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Further Sterling (GBP) Weakness Likely if Johnson Becomes PM

Further Sterling (GBP) Weakness Likely if Johnson Becomes PM

Daniela Sabin Hathorn, Analyst

Talking Points:

  • Tory leadership winner to be announced at 11.00 UK time
  • GBP will continue to experience sell-off pressure if Boris Johnson is confirmed to be the new PM, Jeremy Hunt victory could ignite a surge in GBP
  • GBPUSD eyeing March 2017 lows and EURGBP could breach the 0.90 psychological line

With the winner of the Tory leadership contest and new Prime Minister due to be announced today we may see some renewed signs of weakness from the pound if Boris Johnson is confirmed as the new PM. GBPUSD has continued its steady decline since Friday, falling another 0.2% at the open of the European session to 1.2433.

The market reaction in GBP will depend largely on the chosen candidate’s guidance on Brexit. With Boris Johnson almost certain to be chosen as the new Prime Minister, some cabinet ministers will allegedly resign if he is elected as new PM. The latest to do so is Chancellor Philip Hammond who said that a no-deal Brexit is “not something I could ever sign up to”.

Even though markets are already pricing in the chance of a no-deal Brexit if Boris Johnson is elected as new PM, as can be seen by the continued weakness in GBP in the weeks leading up to today, we can expect the pound to suffer further losses if Johnson is announced as the winner of the leadership contest. The result will be announced at 11.00 UK time. GBPUSD may slip below new lows of 1.2382 recorded last week heading towards April 2017 lows of 1.2364. Further downside pressure can lure sellers to 1.2180, hovering near March 2017 lows. EURGBP would continue to push higher bringing the pair closer to parity, nearing the psychological level of 0.90 where it is likely to face resistance from stops and option expiries.

PRICE CHART: GBPUSD Daily Time-Frame (Sep 2016 – July 2019)

Further Sterling (GBP) Weakness Likely if Johnson Becomes PM

If in an unexpected twist Jeremy Hunt were to be elected as the new Prime Minister, markets would be shocked but to the upside, with expectations of a surge in GBP and domestic stocks, with GBPUSD inching closer to 1.2600 level last seen at the beginning of July.

In other news…

Tensions are running high in the Persian Gulf as Donald Trump has announced it is becoming increasingly unlikely that he will be able to make a deal with Iran. In the last few weeks both the US and Iran have been accusing each other of lying regarding tanker seizures and drone shootdowns as both nations ramp up their security. The capture of a British vessel by Iranian forces on the strait of Hormuz on Friday led to an escalation in the ongoing dispute over Iran’s defiance of an EU ban on exports to Syria, which originated on July 4 when UK officials detained and Iranian tanker off the coast of Gibraltar. Major global disruption can arise if tensions continue to escalate, with increasing likelihood that Iranian forces will retaliate against western countries, leading to oil prices skyrocketing and pushing global economies into recession.

Recommended Reading

Eurozone Debt Crisis: How to Trade Future Disasters – Martin Essex, MSTA, Analyst and Editor

KEY TRADING RESOURCES:

--- Written by Daniela Sabin Hathorn, Junior Analyst

To contact Daniela, email her at Daniela.Sabin@ig.com

Follow Daniela on Twitter @HathornSabin

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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