The Pound Sterling (GBP) appears to have started to move left in the Asian session this Wednesday morning. The GBP/USD pair is seen declining to around 1.3245 due to the combination of political issues in the UK and increasingly hawkish US interest rate projections.
Tonight, Pound traders will focus on the speech of the Governor of the Bank of England (BoE), Andrew Bailey, while tomorrow (Thursday), full attention will turn to US labor market data (ADP & NFP).
Here are the main reasons why the Pound Sterling is facing selling pressure:
1. UK Political Drama: Waiting for Andy Burnham's Move
The political temperature in the UK is heating up again after Keir Starmer bowed to political pressure and announced his resignation as leader of the Labour Party last week.
New PM Candidate: If no other candidate dares to challenge, Andy Burnham is expected to be officially sworn in as the new UK Prime Minister as early as July 17.
Market Focus: Burnham on Monday vowed to make radical changes to the UK political system by giving more power to the overseas territories and driving 10-year economic growth.
What's the Sentiment?: Traders are now fully focused on who Burnham will appoint as the new Finance Minister. This election is very critical as it will determine the direction of the Pound and the UK bond market.
2. BoE Expected to 'Hang' on Interest Rates
Investors are now starting to reprice (reprice) interest rate projections in the UK. According to surveys, the average economist expects the BoE to keep the benchmark interest rate at 3.75% until the end of this year. The lack of a driver for further rate hikes in the UK makes the Pound less attractive compared to the US Dollar.
3. Traders Bet on the Fed to Raise Rates 3 Times!
In contrast to the situation in the UK, the US Dollar (USD) received a strong tonic as the market is now pricing in that the Fed may raise interest rates at least three more times this year!
According to the latest data from the CME FedWatch Tool, the market now sees a 64% probability that the Fed will raise interest rates at its September meeting. For a clearer indication of whether the Fed will remain hawkish or not, traders are now awaiting the release of the ADP employment data (tonight) and the peak Non-Farm Payrolls (NFP) data tomorrow night.
Traders’ Conclusion: The combination of political uncertainty in London and the strong USD momentum makes the GBP/USD pair quite risky to fall further if the current support level is breached. Make sure you manage your position risk wisely ahead of the US data releases tonight and tomorrow.
Do you think the Pound can make a U-turn after Andrew Bailey’s speech tonight?
