How is the GBP Faring Against the Greenback?
The Big Question: Will Prime Minister May Invoke Article 50 of the Lisbon Treaty?
The GBP/USD currency pair is trading at 1.3138, down 0.81% or $0.0107. The pair has a 52-week trading range of $1.28 on the low end and $1.58 on the high end. Currency markets have been racked by concerns and volatility surrounding the Brexit saga. It is not yet known what, if any, long-term impact Britain’s extrication from the EU will mean. However, speculators are not wasting any time and they have shorted the GBP/USD pair en masse. Now that Theresa May is officially the new British Prime Minister, as at 13th of July 2016, market participants have calmed to a degree.
However, widespread uncertainty remains about what she plans to do about a Brexit. She stated that Brexit means Brexit, but very little clarification has been forthcoming. May went to great pains to extol her grand ideas about building Britain’s cities via infrastructure and investment, making CEO pay subject to shareholder approval and stabilising the U.K.’s finances. But when the issue turns to Britain’s trade relationships with the European Union she is eerily silent. Perhaps it is because Prime Minister May was a proponent of the pro-remain campaign. Nonetheless, she has vowed to support the majority opinion and lead Britain out of the European Union.
In the House of Commons, the Conservative Party holds 330 seats and the others hold 320 seats. The members of Parliament who supported the remain campaign numbered 463 and those who supported the leave campaign numbered 150. May was clearly in the majority on the issue, although the British populace voted 51.9%-48.1% to leave. The big question is whether Prime Minister may well attempt to rejoin the European Union via some backdoor pathway, trigger a second referendum on the issue, or simply delay as long as possible. She has stated unequivocally that as PM of the United Kingdom she will make sure that Britain leaves the European Union. Recall that Prime Minister Cameron refused to touch the Brexit issue and deferred to his successor, in this case May.
Theresa May’s impact on the GBP
Wednesday, 13 July marked the first day in office for Theresa May as Prime Minister of the United Kingdom, but markets were not overwhelmingly supportive. This is evident in the weakness of the GBP/USD pair and other currencies that the pound trades with. Part of the poor sentiment is related to her reluctance to give any clarity on the Brexit issue. She stated earlier on that she would wait until the end of 2016 to tackle the issue, perhaps later into her leadership position. As long as procrastination continues, we are unlikely to see much if any appreciation of the GBP against its trading partners. Markets despise uncertainty and the GBP has come under fire for the extreme volatility owing to the Brexit vote.
Another issue which is weighing on the GBP/USD pair is the Bank of England interest rate decision. While the pound fluctuated on both sides of the mean, it has remained largely stable in a tight trading range. While there were strong gains on Tuesday, 12 July, Wednesday with a far more muted session of trading. For Thursday, 14 July there was a great degree of expectation that the Bank of England and its governor Mark Carney would announce an interest-rate cut of 0.25%. No such rate cut has happened in 7 years. The likelihood that this will happen on Thursday, 14 July was at 70% according to the latest polls. An interest-rate cut would cause the GBP to depreciate, but it will also have a positive effect on the UK economy by spurring economic growth.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.