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Boris Johnson confirmed as UK PM, what does it mean to pound?

Author: Kushal Asthana/Wednesday, July 24, 2019/Categories: Exclusive, Economy

Boris Johnson confirmed as UK PM, what does it mean to pound?

The coming days will see meetings of European Central Bank (ECB), Federal Reserve, Bank of Japan (BOJ) and Bank of England (BoE). The UK will have a new Prime Minister soon.  The prospect of a no-deal Brexit despite the UK Parliament's attempt to frustrate such a course has encouraged the EC to develop a substantial aid package for Ireland. Boris Johnson is all set to officially win the Tory leadership challenge and become the next Prime Minister.  As per some reports he is considering his former adviser Lyons to head the Bank of England when Mark Carney steps down later this year.  Several senior ministers, including the Chancellor of the Exchequer Philip Hammond, are expected to resign over the next 48 hours.  UK foreign minister Sir Alan Duncan has already resigned in protest against the possibility of Johnson becoming the next Prime Minister.

GBP ended last week at 1.2490 against USD after hitting a weekly high of 1.2581 and a low 1.2383. Trades currently at 1.2452 down 0.18 % against the USD.  Average weekly earnings in the UK rose 3.6% (May) excluding bonuses and 3.4% with bonuses for the past three months on Year-Over-Year compared with 3.4% and 3.2% respectively. Though, other details of the report suggested the labor market is cooling.  The claimant count rose for the second consecutive month, and at 38K in June, was at its highest level in a decade.  It has averaged a little more than 28k this year compared with less than 11k in H118.  The growth in jobs was less than expected though unemployment was unchanged at 3.8% (ILO).UK's June CPI readings were as expected with the headline CPIH unchanged at 19% and CPI flat at 2.0%.  Producers prices were softer than expected, and input prices on a year-over-year basis fell into negative territory (-0.3%) for the first time in three years.  Output prices were also the weakest in three years but remained in positive territory (1.6%). Sterling has shown little reaction to the economic news in the recent past and remained broadly weak against majors.

The focus remains on Brexit and perceptions that the risk of a no-deal exit at the end of October has increased. This is taking sterling further lower. Sterling volatility is getting higher as the risk of the UK crashing out of the European Union (EU) grows.

Sterling remains on the back foot as investors are worried about Boris Johnson becoming the UK's next prime minister. This outcome would trigger a "hard Brexit" from the European Union, widely seen as a major risk for the British economy. Britain's Conservative Party will announce the results of a leadership election on Tuesday. Johnson is widely expected to win, setting him up to become prime minister on Wednesday. Speculation is growing that Johnson will pull Britain out of the EU on October 31 without a trade deal in place. Top hedge funds have increased short positions on the pound in the recent trades. Political changes along with Brexit uncertainties are a great time for Pound traders to indulge in heavy trading in GBP pairs!! (The author is Research Analyst - FX & Commodities)

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