GBP/USD – Hard Brexit the new reality?

Craig Erlam MarketPulse

UK leadership race heats up

The number of MPs vying for Conservative leaders – and therefore UK Prime Minister – has already shrunk considerably ahead of last night’s debate, although there is one more than it appeared after Boris Johnson decided, as frontrunner, it wasn’t in his best interest to show up and be targeted by so many colleagues at the same time.

That pleasure will be saved for the second debate on Tuesday, after the second ballot has whittled down the numbers a little further when Johnson will no doubt feel a little safer from being ganged up on.

As ever, currency traders will be fixated on this weeks events as we learn what kind of Brexit the country could be headed for. It seems all but certain that Boris will be in the final two but who will be joining him? All candidates want to deliver Brexit but there’s a very different approach between Dominic Raab and Jeremy Hunt, for example, the former of which looks determined to deliver no-deal on 31 October.

GBPUSD sank on Friday, as the dollar ended the week on a strong note but the pound overall continues to look vulnerable this week to the potential for a Johnson/Raab final two. We’re currently trading around 1.26 but momentum looks to the downside.

The end of 2018/start of 2019 lows look very much in sight, with a break below here looking very bearish for the pair. The next notable area below is around 1.24 but if no-deal is looking increasingly possible, how long can that be expected to hold?

The leadership race is not the only point of focus in the UK this week – although as far as the markets are concerned it’s by far the most important and will likely have the greatest impact. The Bank of England meets and announces its latest decision on Thursday.

You can be forgiven for not getting too excited about this in the current climate and with there being considerable uncertainty over Brexit. Even markets don’t much any time soon – 75% chance of no change between now and August next year – so we probably shouldn’t expect too much from Thursday. Retail sales and inflation data will also keep things interesting this week.

Author

Craig Erlam

MarketPulse

Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary.

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