GBP/USD – Pound Punches Past 1.31 as May Poised to Take Over as Prime Minister

The British pound has posted considerable gains on Tuesday, as GBP/USD has climbed to 1.3140. On the release front, the Bank of England released the minutes from its previous Financial Policy Committee meeting. BoE Governor is testifying before the Treasury Select Committee about the Financial Stability Report, which was released last week. In the US, today’s key event is JOLTS Job Openings, with the indicator expected to dip to 5.74 million. We’ll also hear from two FOMC members during the day, and the markets will be looking for clues regarding the Fed’s future monetary policy.

The British pound is finally on a roll, posting strong gains on Tuesday. GBP/USD is up 200 points this week, as Britain’s political picture has stabilized more quickly than expected. Prime Minister Cameron was expected to remain in a caretaker role until the autumn, but he will relinquish the reins on Wednesday, when Home Secretary Theresa May will take over as Prime Minister. May was a strong supporter of the Remain camp, but she will now be mandated with presiding over Britain’s exit from the European Union. May has stated that the government fully intends to honor the referendum vote, stating “Brexit means Brexit”. However, Britain’s exit could be a protracted and messy affair. The British electorate may have voted “Leave”, but the vote may prove to be the easy part of the process. An EU member has never invoked the exit clause before, and there is no timetable as to when the exit will occur or what kind of trade agreement will define the new economic relationship between the EU and Britain. The Brexit vote to leave the EU in late June has caused political and financial turmoil in Britain and sent the pound reeling. Still, there is some optimism in the air as the political landscape appears to have stabilized.

The Bank of England is expected to lower interest rates by a quarter point on Thursday. This would reduce rates to just 0.25 percent, and would mark the first rate reduction since 2009. The markets have priced in a 75 percent chance that the BoE will cut rates this week, but such a dramatic move could well produce some volatility and push the pound to lower levels. The BoE is hoping that a rate cut will help cushion the fallout from the Brexit vote to leave the EU, which was completely unexpected and has caused financial and political turmoil in the UK. Brexit is widely expected to cause an economic slowdown in Britain, possibly even a recession. However, there is no hard economic data about the effects of Brexit on the economy and none will be available before September.

The Federal Reserve has stayed on the sidelines in the first half of 2016, and the markets aren’t expecting a dramatic shift anytime soon. Last week’s minutes from the June policy meeting indicated that Janet Yellen & Co. remain cautious about the strength of the US economy. Although some Fed members have said that rates could be raised up to two times in 2016, clearly the markets aren’t buying it. Given the current economic climate, the markets are pessimistic about any rates moves before 2017. Investors have priced in no chance of a rate increase at the next Fed meeting on July 26-27, and just an eight percent chance of a hike in 2016. Still, market sentiment can change very quickly, so if US employment and inflation numbers improve in the second half of the year, the likelihood of a rate hike sometime this year will increase.

GBP/USD Fundamentals

Tuesday (July 12)

• 4:30 Bank of England FPC Meeting Minutes
• 5:00 BoE Governor Mark Carney Speaks
• 6:00 US NFIB Small Business Index. Estimate 94.1
• 7:00 BOE Quarterly Bulletin
• 9:15 US FOMC Member Daniel Tarullo Speaks
• 9:35 US FOMC Member James Bullard Speaks
• 10:00 US JOLTS Job Openings. Estimate 5.74M
• 10:00 US Wholesale Inventories. Estimate 0.2%
• 13:01 US 10-year Bond Auction

* Key releases are in bold

*All release times are EDT

GBP/USD for Tuesday, July 12, 2016

GBP/USD July 12 at 7:45 GMT

Open: 1.2981 High: 1.3187 Low: 1.2973 Close: 1.3136

GBP/USD Technical

• GBP/USD has posted gains in the Asian and European sessions
• 1.3064 is providing support
• 1.3142 was tested earlier in resistance and is fluid. It could see further action in the North American session

Further levels in both directions:

• Below: 1.3064, 1.2990 and 1.2840
• Above: 1.3142, 1.3219 and 1.3349
• Current range: 1.3064 to 1.3142

OANDA’s Open Positions Ratio

GBP/USD ratio is showing limited movement on Tuesday. Long positions have a majority (55%), indicative of trader bias towards GBP/USD continuing to move higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.