Market Analysis

Sterling on the ropes ahead of next round of Tory leadership battle

The British pound slumped to its weakest trading level against the U.S Dollar since January 3rd on Monday, as traders became increasingly nervous about the prospect of Boris Johnson becoming the next British Prime Minister. Boris Johnson’s preference towards a hard-Brexit scenario if the United Kingdom fails to reach a deal with the European Union by October 31st, sent the British pound reeling across the board.
Tuesday is another pivotal day for UK politics, as Members of Parliament will cast their vote in the second round of the Tory leadership battle, in which they will eliminate at least one of the remaining six candidates, while the last two candidates left at the end of the contest will face Tory members in an actual postal vote.

Boris Johnson has now pledged to participate in a live televised debate with other Tory party leadership candidates this week, with UK financial markets braced for further volatility as he elaborates on his plans for Brexit, the United Kingdom’s relationship with the European Union, potential post-Brexit trade deals and Mr.Johnson’s planned changes to the rate of UK taxation if he becomes the new UK PM.
The British pound is also in the spotlight for other reasons this week; the Bank of England meets to decide on interest rates on Thursday, while the United Kingdom economy also releases important inflation and retail sales figures. UK retail sales numbers for May are predicted to contract while inflation is also expected to notably outperform, which could see even further volatility in the British pound.
Bank of England Governor Mark Carney could send further ripples through the British pound on Thursday if he outlines the case for a potential rate hike, although the commentary coming from from the MPC is not expected to be overly hawkish, given that UK economic data points could start to turn lower as Brexit front-loading effects are starting to dissipate and business confidence remains at record low levels.


GBP/USD Daily Mountain Chart | Source: ActivTrader

GBP/USD Daily Mountain Chart | Source: ActivTrader


The GBP/USD pair is approaching major technical support, at 1.2442, weakness below this key level may trigger stops towards at least the 1.2400 to 1.2350 area. Bulls looking for a risk-reward entry may look to enter near the 1.2442 level, in hope that sellers are unable to take out this key technical level and the GBP/USD pair then returns back towards the 1.2600 level.


Written by Nathan Batchelor, External Analyst, ActivTrades

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