Pound rises despite Boris turmoil

The British pound is in positive territory today. GBP/USD is trading at 1.1977, up 0.46%. There are no tier-1 releases out of the UK today, but investors are glued to the scintillating political drama at 10 Downing Street.

Boris Johnson announces resignation

The Boris Johnson era is over. The British Prime Minister is perhaps the UK’s most colourful politician and has displayed uncanny political survival skills. At the same time, Johnson has made some serious missteps which have seen his popularity nosedive. After massive resignations from ministers and members of his Conservative party, Johnson had no choice and resigned earlier today. Johnson is no longer Conservative party leader today but will remain the Prime Minister until the fall. The British pound and UK stock markets are higher on the news, as investors appear keen for a change in the Prime Minister’s office.

The FOMC minutes provided a hawkish message to the markets, but I doubt any investors were surprised by what they read. Fed members indicated their concern that inflation expectations were accelerating and said that much higher rates could be required to rein in these expectations, even if this weakened the economy.

To his credit, Fed Chair Powell has been transparent with the markets and has served notice that he will do what it takes to bring inflation back to the Fed’s target of 2%. Inflation has been a stubborn adversary, hitting a 41-year high of 8.6% in May, and no sign of the sought-after inflation peak.

What’s next for the Fed? The policy meeting on July 27^th will likely feature another sizeable rate hike of either 0.50% or 0.75%. There are signs that the Fed’s aggressive rate hikes have slowed the US economy – consumer spending slowed in May and home sales continue to fall. This has raised concerns that if the Fed doesn’t ease up on rate increases, the economy will tip into a recession. The Fed has a huge challenge in reining inflation and inflation expectations. The minutes noted that the Fed will have to provide “clear and effective communications” in order to achieve these goals.

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GBP/USD Technical

• There is support at 1.1870 and 1.1780
•  GBP/USD is testing resistance at 1.1940, followed by resistance at 1.2137

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