Pound hit in forex markets as UK PM changeover day arrives

Chris Lee

LondonThe British pound was one of the worst hit currencies of the forex trading day on Monday and into Tuesday as traders began to prepare for the expected election of a hard-line Brexit supporter to the country’s top job.

Boris Johnson, who has long been seen as the frontrunner to replace outgoing Conservative Leader and Prime Minister Theresa May, is due to be confirmed at 11.45am GMT.

Johnson’s final competitor in the race, current Foreign Secretary, Jeremy Hunt, is also committed to Brexit.

Johnson is believed to be willing to take the UK out of the European Union on October 31st, which is the next deadline, come what may.

Hunt has not said he would do that.

A so-called hard Brexit is not a favoured outcome for the currency markets, and the news of Johnson’s probable election meant that the pound continued its run of negative performance.

It was trading at $1.2477 in the GBP/USD pair, which was close to a 27 month low point. It has been in this region for over a week. In fact, over the course of last quarter, the pound has seen 3.5% of its value shaved off compared to the US dollar.

There were also effects for the euro as a result of the uncertainty around Britain’s Brexit saga. It was towards the lower end of its trading range over the course of the session, but overall it managed to remain fairly firm.

In its pair with the US dollar, the currency stayed strong at $1.1208.

However, the next big hurdle for the single currency will be the meeting of the European Central Bank which is scheduled for Thursday of this week. At that meeting, policy makers are expected to at least announce some form of stimulus. There is a prediction among some that deposit rates will go down by 10 basis points from their current position of -0.4% to -0.5%. One study found that there is a 43% likelihood of this taking place.

The US dollar, meanwhile, continued to grapple with the possibility of major interest rate cut. The Federal Reserve, which is the country’s central bank, is thought to be preparing to cut rates by either 25 basis points or even 50 basis points.

There are some key moments on the economic calendar which could push the Federal Open Market Committee’s policy makers one way or the other in the coming weeks. One of these is the gross domestic product data release due later this week.

With jitters around these developments affecting traders, the dollar index failed to rise as much as may be expected in the face of its competitor currencies showing such declines. The index, which is dynamic tool used to calculate the dollar’s value in comparison to six other global currencies including the British pound and the euro, rose only a tiny bit to 97.314.

The greenback saw no change in its pair with the so-called safe haven Japanese yen, the USD/JPY. Against the yen, the currency rose a little to 107.91.

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Chris Lee
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