The markets were bracing for a battle for the prime minister’s seat, but instead saw a quiet handover of power to Andy Bernham. Moreover, the new Labour Party leader does not plan to deviate from the old fiscal rules. This factor is supporting GBP/USD quotes. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The UK has seen its sixth prime minister in seven years.
- The smooth transition of power has supported the GBP/USD pair.
- The central banks’ passivity is beneficial for the pound.
- If the GBP/USD pair holds above 1.32, long positions can be considered.
Weekly Fundamental Forecast for Pound Sterling
Buy the rumor, sell the news. At first glance, the pound unexpectedly strengthened following reports of Keir Starmer’s resignation as Prime Minister. However, investors had long been pricing in this scenario in GBP/USD quotes while simultaneously selling gilts. The decline in their yields amid the leadership reshuffle in the government served as yet another demonstration of the effectiveness of time-tested market principles.
UK 10-Year Bond Yield
Source: Bloomberg.
Between 1945 and 2016, the UK had only 13 prime ministers, and power shifted back and forth between the Conservatives and the Labour Party. Now, heads of government change on average once every 14 months. Over the past seven years, five have already stepped down. In addition to the two major parties, there are several other major political forces in the country, with regional parties forming governments in Scotland, Wales, and Northern Ireland. A country that once positioned itself as a harbor of stability is now a hotbed of turmoil.
However, what matters is not the change in leadership itself, but how it came about—and what views the new leader will hold. In this regard, Keir Starmer’s voluntary resignation and the willingness of other candidates to hand the prime minister’s post to Andy Burnham without elections are viewed by the markets as a bullish factor for the GBP/USD pair.
Number of UK Fiscal Rules
Source: Bloomberg.
Moreover, the new Labour Party leader—who is set to take office any minute now—intends to stick to the existing fiscal rules. Since their introduction in 1997, the UK has frequently changed and amended them, which has often been a source of instability. Andy Burnham wants none of that.
The markets are breathing a sigh of relief at his rise to power, and this opens the door to the familiar pattern of buying UK assets following a change in prime minister. This is what happened after Liz Truss’s resignation, when GBP/USD quotes rose steadily from record lows. With political risks receding into the background, the pound is able to perform well now as well. However, the future trajectory of the UK currency will depend on monetary policy.
The futures market expects one or two rounds of monetary tightening from the Fed and doubts that the Bank of England will raise its repo rate. Expectations of a widening interest rate spread are weighing on the GBP/USD pair. However, if the Fed decides not to make any changes, speculators who close their short positions on the pair will drive its price higher. The main risk factor in this scenario is a loosening of the BoE’s monetary policy. MPC member Alan Taylor discussed this possibility in the event of lasting peace in the Middle East and a drop in oil prices.
Weekly Trading Plan for GBP/USD
Dovish policymakers are unlikely to gain the upper hand at the Bank of England. The UK strives toward stability, particularly in interest rates. Against this backdrop, if the GBP/USD pair moves above 1.32, long positions can be considered.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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