The Pound has found a footing this week following a four-week phase of underperformance. This has helped Cable establish a range around the 1.2700 level, up from the five-month low that was seen last week at 1.2559. EURGBP has concurrently come off trend highs, and GBPJPY has lifted out of trend lows. This week’s May PMI data out of the UK painted a picture of an economy limping along at a marginal rate of expansion, with modest expansion in the dominant service sector offsetting contracting construction and manufacturing sectors.
The focus in the UK is now squarely on the Conservative Party’s leadership contest, which formally commences next Monday and will, by week beginning July 22, have installed a new prime minister. Boris Johnson remains the favourite, in a crowded field that currently stands at 11. Mr Johnson (and a number of other leading candidates) favours a hard, no-deal-if-necessary Brexit. This should limit the Pound’s recovery potential. The EU’s red lines regarding Brexit are well established, and it doesn’t look like Brussels will bend even in the face of a credible UK threat to leave the EU without a deal on divorcing terms or an outline on future trading terms (and a multi-year transition period that this would bring), though hardcore Brexiteers argue otherwise, pointing out that May’s equivocation meant that the EU never believed the UK was serious about taking the nuclear option that is the no-deal Brexit. By the time the new prime minster picks up the reins there will be little more than three months left until the October-31 deadline to leave the EU.
Theresa May took the UK’s top political job July 11 2016 following the resignation of David Cameron, when GBPUSD was hovering around 1.3000. By October it had fallen to 1.1630, before recovering during 2017 and early 2018 to peak during April at 1.43750. In the last 15 months there has been a steady downtrend as the uncertainty of the Brexit process has weighed heavily on Sterling.
After one month of underperformance, expectations are that the Pound will now establish a consolation range at the newly established lower levels as market participants, having priced-in heightened odds for a no-deal scenario and a softened UK economic outlook, and wait on substantive developments, whatever they may be. The sentiment and the fundamentals bias remains set against the Pound for now. Let the Summer commence.
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Head Market Analyst
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