The pound recorded its 2-month lows against the greenback yesterday as European markets reopened following the Easter long weekend. The lack of new economic data from the UK and investors’ shift to safe-haven assets also aided the decline of the GBP/USD currency pair in the American session. From a high of 1.3019, the GBP/USD currency pair yesterday fell in the early London session to a low of 1.2913 in the US session and was hovering around these levels at the time of writing this article.
The currency pair yesterday started trading range-bound during the Asian session. But in the early London session, the currency pair gained momentum as buyers entered the fray and pushed the pound to its daily highs. However, it did not last long as there was no continuous support from prominent investors and speculators.
The cable then started declining all the way into the US trading session as inter-party Brexit talks began. Rumors of a coup attempt by senior Conservative Party leaders against the UK Prime Minister Theresa May acted as a catalyst to the currency pair’s downtrend.
There were reports that Conservative Party members wanted the Prime Minister to step down before next month’s European Parliament elections.
Robin Wilkin, a strategist with Lloyds Bank, said “Political headlines are the main risk for GBP. Media reports suggest that UK PM May is facing renewed pressure to step down, this time from the grassroots level.”
Over the holiday weekend, news outlets reported that members of the Conservative Party are so frustrated by the drop in public support that they are prepared to change time-honored unwritten rules to push for the removal of Prime Minister Theresa May. More than 70 local party chiefs, upset at her handling of Brexit, have demanded a rare general meeting to debate her leadership.
A non-binding poll will be carried at that National Conservative Convention EGM. Additional reports indicate Sir Geoffrey Clifton-Brown, the treasurer of the backbench Conservative parliamentarians’ committee of 1922, said he anticipates the group’s members to vote on whether to push forward the date on which a contest to May’s governance can be started.
On December 12th, May won a no-confidence motion on her Conservative Party leadership by a 200-117 vote, and as per the existing rules, she is shielded from additional challenges for a year. To date, May is trying to create a consensus to get approval for the Brexit withdrawal agreement she made with the EU in the final leg of 2018.
Markets appreciated this approach, as any consensus deal would likely lead to a “softer” Brexit. Unable to rally around May’s deal, the party made sure that she chose to postpone Brexit instead of leaving without a trade agreement.
However, after May decided to postpone Brexit until October 31st, the public backing for Conservative Party collapsed, with some surveys pegging the figure at 23%, down 10 points from the earlier level. Even if May survives until October, she will face tremendous pressure to deliver Brexit. So, anticipations for a ‘no deal’ could only increase as we go forward.
Furthermore, if May is ousted, it is extremely likely that Conservative membership would settle for a Brexiteer, someone who will try to re-discuss the current EU Brexit deal. If the EU refuses to discuss, which is quite likely, the new leader would probably settle for a ‘no deal’ Brexit. Therefore, domestic politics are progressively pointing to a ‘no deal’ Brexit, and this augurs negatively to Sterling’s outlook.
If the market makes a similar assumption, the Sterling will drop as speculators and investors will include higher risk premiums into the currency. The greenback’s rally as monitored by the US Dollar Index was mainly driven by switching of investor’s risk feeling towards safe-haven assets. Greenback is a favorite to investors as global equities declined.
The image below shows that the GBP/USD pair has started declining after failing to cross above the resistance level of 1.2980. The momentum remains flat. As a result, we can expect the currency pair to drop further and complete AB=CD formation by reaching around 1.2820.
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