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Cabinet resignations weigh on the pound

Wednesday 6 July, 2022

Daily Currency Update

Yesterday afternoon saw the pound collapse versus the US dollar by almost 2%. When the initial drop started, the market was under the impression this was to do with further global risk aversion and recessionary fears in the UK weighing down on the pound and bolstering the US dollar. However, it was the revelation around 6pm yesterday evening that gave the clarity to why the pound was taking a beating yesterday afternoon. It transpired that two senior ministers in Boris Johnson's cabinet, the Chancellor Rishi Sunak, and Health Minister, Sajid Javid, had both decided to resign from their posts. With the latest bout of controversy surrounding the UK government, the Chris Pincher apology by the Prime Minister seemed to be the straw that broke the camel's back for Boris Johnson's ministers. We also saw a number of other junior ministers and aides resign. The market is now wondering how much longer Boris Johnson can hold on for. Prime Minister's Question Time takes place at 12 noon in the UK parliament, and all eyes will be on Johnson's statement and any signs of him calling it a day, with the uncertainty set to cause further volatility for the pound in the coming hours and days. Yesterday saw better than expected UK Services PMI data, and we also had the deputy governor of the BoE expressing his view on surging inflation stating the current inflation we are seeing is primarily coming from abroad and that the UK is still targeting a figure of 2% for the future. However, all eyes appear to be on political sentiment at the moment over data-driven movements.

Key Movers

The US dollar continued its rally yesterday following from last week's trend with global risk aversion continuing to weigh on the likes of GBPUSD. The pair fell further, reaching US$1.1897, the lowest level since March 2020, the only other time it has been this low in over 30 years. The main catalysts for this are fears about a global recession and a worsening growth outlook in the UK, and also the political situation for the UK government. The dollar has taken a slight step back this morning with investors waiting for the final readings of the UK S&P Global Construction PMI for June, and also this evening's minutes from the US central bank's latest interest rate-setting meeting. The Federal Reserve has already made clear plans for a 75 basis point rate hike, which will be the highest hike in the past 28 years. US ISM Services PMI for June is also in focus this week, expected at 54.5 versus 55.9 prior along with Non-farm payroll data out on Friday, which can also cause volatility around the US dollar.

Expected Ranges

  • GBP/USD: 1.1880 - 1.1975 ▼
  • GBP/EUR: 1.1575 - 1.1695 ▲
  • GBP/AUD: 1.7470 - 1.7655 ▼
  • EUR/USD: 1.0140 - 1.0260 ▲