The Sterling Pound In A Tug Of War With The UK’s New Prime Minister

The Sterling Pound In A Tug Of War With The UK's New Prime Minister

Sterling Pound has tumbled over 4% on a month-to-date basis, and the trend seems to continue as no-deal Brexit possibilities are running high. However, for those investors who are selling Dollar to buy pounds, current rates are very lucrative against the past ten years. Although, the ongoing Brexit saga would continue to devalue GBP against the basket of “majors”.

On a year-to-date basis, sterling has fallen approximately 4.65% against the USD. What next now?

On July 23, 2019, Boris Johnson secured a majority vote in favour of him among Tory members and took charge as the British Prime Minister. He is famous for his hard-line statements those he made during his campaign and precisely dedicated to taking UK out of the EU bloc, either with or without any agreement. Meanwhile, EU negotiators made it very clear that they are not going to restart Brexit talks, what was decided with ex-Prime Minister, they are sticking to that till date.

So, now there are two probabilities that could take place in future, i.e., 1) Crash out of UK from the EU bloc without any deal or exercise a no-deal Brexit and 2) the second one is a call for another round of referendum.

In the case of no-deal Brexit, it will have an immediate or quick impact on the UK and EU bloc nations as well. Consequences could be colossal and tedious to find a solution to stabilize the system instantly. On the exit date, the UK will no longer have rights to enjoy single market access to the EU nations, there would be border checks on Import and Export, passport issues for EU citizens staying in the UK or UK Citizens staying in EU nations, new trade rules need to be drafted and many other changes could take place.

How does devaluing Pound impact UK businesses?

Companies which are having a high dependency on the UK and European market could witness more problems than those who are having a globally diversified revenue model.

Tumbling Pound could have a substantial impact on the businesses that are earning the majority of their revenue from the UK market and also the supply chain to these companies will get disrupted substantially post a no-deal Brexit. However, falling Pound could be beneficial for those companies who are earning the majority of their revenues from abroad. That’s why analysts are a bit bullish on the FTSE 100, and FTSE 250 companies as their majority of revenue come from the market overseas.

Recently, we saw Pound rising against the Dollar, Euro other major currencies, but inflating tension between the UK and EU bloc nations over the future of divorce agreement dragged the Pound again into red against US dollar and we assume that any upside movement in the GBP against the US Dollar would be short-lived.

Meanwhile, Commerzbank said that a further decline in Pound by about 10% could cause Boris cabinet to rethink over a no-deal Brexit, and Manulife Asset Management added that if GBP/USD currency pair tumble below 1.19 level, it could take the market in an unfamiliar zone.

Time and again we have witnessed that market volatility is sufficient to create pressure on the governments and increasing volatility could put Boris government under pressure to rethink on a no-deal Brexit kind of scenarios, said currency strategist at Commerzbank AG. He also added that we are assuming another 10% devaluation in the sterling Pound in near-term, which could take the Pound at par with euro.

Also, several Tories privately expressed concerns over the falling Pound and said that now markets were waking up against the real prospects of a no-deal Brexit kind of scenario and the present government is not likely to soften its stance.

A no-deal Brexit has been widely criticized by the economist and market analysts. The fear has scaled up post-Johnson took charge as British Prime Minister and included Brexiteers into his cabinet, seeking changes in divorce agreement from Brussel, which they have strongly rejected.

GBP/USD Price Chart

Source: Investing.com

At the time of writing (as on July 31, 2019, at 11:41 AM GMT), before the market close, currency pair GBP/USD was quoting at 1.2172 and up by 0.19% against the previous closing level. In the year-ago period, the pair has touched a 52w high of 1.3385 and 52w low of 1.2172 respectively. At the current trading level, the pair was quoting below its lower Bollinger Band®, and 14-day RSI of the pair was hovering in oversold territory, which indicates a downtrend in the pair. Also, Price volume trend reflects a bearish trend in the pair, which indicates that Pound could tumble further from the current trading level. However, 1.1960 is a crucial support level for the pair.

However, a rate cut by the US Federal Reserve could bring upside movement in the GBP against the US Dollar, but that movement too is going to be very short-lived. It’s a well-known fact that whenever central banks slashed rates, it tends to devalue the currency, the basic logic behind this is, post a rate cut your currency is going to earn less in fixed income securities which leads to decline in currency value by the same proportion of rate cut.

However, the possibility of a no-deal Brexit on 31 October, which many regards to be profoundly damaging for the British economy, has increased to 40%, according to a report by National Institute of Social and Economic Research (NIESR). Analysts at UBS pointed out that the Conservative party is not united, and the lack of majority poses a potential barrier for Mr Johnson. Although they believe there is a 50% chance of a no-deal Brexit, there are still high chances that the UK would ask for a further extension to exit day. This might be due to a general election because of a no-confidence vote or because of a change in stance from Mr Johnson

Boris Johnson and Brexit Update

The newly elected British Prime Minister has already announced his plans to hire approximately 20,000 new police officers and construction of new hospitals across the UK within a couple of months. In a recent development, he made a promise to construct a new railway line between Manchester and Leeds. Meanwhile UK’s chancellor Sajid Javid has announced that he is planning to put billions of pounds more to take out UK from the EU bloc.

Meanwhile, the fiscal watchdog of the UK commented that any spending would increase the debt burden of the country and we don’t have a war chest of money that could be kept aside to provide them free lunch. It also warned earlier, that headroom against the 2020 and 2021 borrowing target does not provide sufficient scope of increasing spending decisions.

Recently Office of Budget Responsibly commented that UK’s public finance would be impacted by £30bn a year in case of a no-deal UK’s divorce from the EU bloc. However, the British Prime Minister stated that cost of a no-deal divorce would be small, which was immediately contradicted by the fiscal watchdog of the UK who commented that consequences of a public finance deterioration could be substantial.

In a recent speech at the House of Commons, the British Prime Minister envisaged on nationalism in the parliament and promised to make Britain the greatest place on Earth and pronounced his tenure as the start of a new golden era. He promised to provide high-speed 5G mobile to everyone, reduce carbon emissions in the state, build new-railways, slash taxes, make homeownership affordable and hire 20,000 more police officers. He envisaged his oldest, biggest and the most important promise of taking the UK out of the Europe Union bloc in less than 100 days of his tenure, with or without a formal agreement, creating jitters among pro-Europeans and financial markets. He added that he would not pursue with the Irish-backstop plan presented by his predecessor, Mrs Theresa May, and said he would reopen talks over the exit agreement that former prime minister and her EU counterparts spent two years negotiating.

Boris Johnson, who is often compared with US President Donald Trump, started his professional career as a journalist. As a Brussels correspondent, he wrote sceptically about the European Union and was known to play loose with facts. During the referendum, he became the unofficial leader of the Vote Leave campaign by going against his political allies, including the Pro-Remain Conservative Prime Minister David Cameron, who used to see him as the future prime minister of the country. After Boris Johnson was declared the next British prime minister, financial markets remained unusually calm, and business groups took a constructive tone, as the FTSE 100 was up slightly and the Pound held steady, fluctuating around the $1.247 mark after Mr Johnson used his victory speech to try to drum up some optimism. Despite some cautious optimism showed by industry leaders and experts, companies fear of the unsteady tone of the new prime minister, who had infamously shown little regard for business concerns in the past.

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