British political drama adding to the pound’s woes :: InvestMacro

by ForexTime

The news that Boris Johnson has resigned as Prime Minister of the United Kingdom has provided little comfort to the British pound.

Although up around 0.4% at the time of writing, GBPUSD is struggling to hold onto the psychologically important 1.20 level.

Today’s bounce could be due to some price action surrounding the rumor and reality, noting that expectations surrounding Johnson’s resignation have been building for some time now.

Technical forces could play a role today, as the 14-day RSI is moving away from the 30 threshold indicating oversold conditions.

Overall, the headlines out of 10 Downing Street today did not lead to a seismic move for the GBPUSD.

To be fair to the beleaguered Pound, it is set to post its biggest one-day gain so far this month – little consolation when put into context, as shown in the chart above.

Get our free MetaTrader 4 indicators – Put our free MetaTrader 4 custom indicators on your charts when you join our weekly newsletter

Get weekly commitment to traders’ reports Find out where the largest traders (hedge funds and commercial hedgers) are located in the futures markets on a weekly basis.

Although the British pound is making gains against all of its G10 peers for the day, with the exception of commodity-linked currencies such as the Australian dollar and the New Zealand dollar.

However, there are other, more pressing factors that have been put in place to keep the Pound alert for the coming months.

First, the UK may already be in a recession, considering its economic data has led to some dismal reading:

  • British economy witnessed Unexpected contraction Back in April, it contracted 0.3% compared to March – its biggest drop in more than a year. The second-quarter data points to another quarterly contraction – meeting the criteria for a technical slump.
  • UK manages a file Huge current account deficitWhich amounted to 4.2% of its GDP in the first quarter of this year – one of the largest deficits in the world!
  • UK inflation hits 40-year high. The May Consumer Price Index (CPI – used to measure the line of top inflation) rose 9.1% in May – its highest reading since the first quarter of 1982. Inflation is also expected to reach double digits in the fourth quarter of 2022.

And while the Bank of England (BOE) appears committed to raising rates in the name of quelling hyperinflation, such aggressive moves only increase the odds of a UK recession, given weak economic fundamentals.

In fact, the Bank of England had already issued a warning back in May of a possible recession.

Also back in May, our article appeared on this line: “A path towards 1.20 may be more likely for this “cable” currency pair, rather than a path to 1.30. “

But wait there is more.

There are still Brexit risks to be dealt withwhile the rise in Covid-19 cases in the UK is not helping matters.

Of course, the financial outlook (how the government can support the British economy) depends largely on the policies of the next British prime minister, and it may be weeks or months before a replacement for Johnson is identified, with more time needed for their policies. It will be formed, after which it will be enacted before appearing in real economic data.

With the current situation, markets are considering a 60% chance that we will see GBPUSD reach 1.15 sometime in the fourth quarter.

In short, there is no reason to be optimistic about the UK economic outlook, which is set to expose GBPUSD to further declines, while hampering cable’s ability to post any significant recovery in the near term.

Forex Time LogoArticle by forex time

ForexTime Ltd (FXTM) It is an international award winning online forex broker and regulated by CySEC 185/12

Source link

Add a Comment

Your email address will not be published.