UK political drama adds to GBP’s woes

July 7, 2022

News that Boris Johnson has resigned as UK Prime Minister offered scant relief for the British Pound.

Though climbing some 0.4% at the time of writing, GBPUSD is straining to hang on to the psychologically-important 1.20 level.

Today’s bounce could be down to some price action surrounding the rumour and the fact, noting that expectations surrounding Johnson’s resignation had been bubbling for some time now.

Technical forces could even be at play today, with GBPUSD’s 14-day relative strength index pulling away from the 30 threshold which denotes oversold conditions.

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Overall, today’s headlines out of 10 Downing Street hasn’t resulted in a seismic move for GBPUSD.

To be fair to the beleaguered Sterling, it is set for its largest single-day gain so far this month – scant consolation when put into its proper context, as seen in the chart above.

The British Pound though is registering an advance against all of its G10 peers for the day, except against commodity-linked currencies such as the Australian dollar and the New Zealand dollar.

And yet, there are other more-pressing factors that are set to keep the Pound on the back foot for the months ahead.

For one, the UK may already be in a recession, considering that its economic data has made for some dismal reading:

UK economy saw an unexpected contraction back in April, shrinking by 0.3% compared to March – its sharpest drop in over a year. Q2 data suggests another quarterly contraction – fulfilling the criteria for a technical recession.
The UK is running a massive current account deficit, which ran at 4.2% of its GDP in the first quarter this year – one of the largest such deficits in the world!
UK inflation is at its highest in 40 years. The May consumer price index (CPI – which is used to measure top line inflation) rose by 9.1% in May – its highest reading since Q1 1982. Inflation is also forecasted to reach double-digits in Q4 2022.

And although the Bank of England (BOE) appears committed to hiking its rates in the name of cooling scorching-hot inflation, such aggressive moves only ramp up the prospects of a UK recession, given such weak underlying economic fundamentals.

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

Also back in May, our article featured this line: “A path towards 1.20 may prove likelier for this currency pair known as ‘cable’, rather than a path back up to 1.30.”

But wait, there’s more.

There are still Brexit risks to contend with, while surge in Covid-19 cases in the UK aren’t helping matters.

Of course, the fiscal outlook (how the government can support the UK economy) is very much dependent on the policies of the incoming UK Prime Minister, and it could be weeks or months before Johnson’s replacement is determined, with more time needed for their policies to be formed, and later still to be enacted before showing up in the real economic data.

As things stand, markets are pricing in a 60% chance that we could see GBPUSD reach 1.15 sometime in Q4.

In short, there’s hardly any reason to be optimistic about the UK economic outlook, which is set to expose GBPUSD to more downside, while hampering cable’s ability to register any significant recovery over the near term.

Article by ForexTime