After Rachel Reeves appeared tearful in parliament, markets experienced a decline due to concerns regarding her potential resignation as finance minister. The current Chancellor of the Exchequer may be replaced by someone who will adopt a more relaxed fiscal policy. Let’s discuss this topic and develop a trading plan for the GBPUSD pair.
The article covers the following subjects:
Major Takeaways
Rachel Reeves’ tears in parliament caused the pound to plummet.Rumors of the Chancellor’s resignation are circulating in the market.The Bank of England may cut rates in August.The pullback to 1.356–1.36 allowed traders to increase long trades on GBPUSD.
Weekly Fundamental Forecast for Pound Sterling
In today’s economic climate, the value of the pound is influenced by the Chancellor of the Exchequer’s tears. Rachel Reeves’ emotional outburst in parliament and Keir Starmer’s inability to defend her led to a sell-off of UK assets. Bond yields have surged, and the GBPUSD pair has plummeted by more than 1%.
UK 30-Year Bond Yield
Source: Bloomberg.
The government faces a budget deficit ranging from £8 billion to £22 billion. One option was for Keir Starmer to reverse his election promise not to cut social security spending. However, Rachel Reeves’ plan involved cuts of £5 billion. The plan was rejected by the Labour Party in parliament. The Chancellor’s emotional reaction has led to speculation about her resignation and triggered a sell-off in British assets.
Rachel Reeves is regarded as a proponent of stringent budgetary policies. The Labour Party’s decision to replace her suggests a shift in its strategic direction. Investors immediately drew parallels with the fall of Liz Truss’s government in the fall of 2022. At that time, they identified contradictions between the Bank of England’s monetary restrictions and fiscal stimulus.
The general public has become accustomed to high rates. The Bank of England has no intention of changing them at this time. Andrew Bailey believes that lower-than-expected corporate and household debt levels make them less vulnerable. The central bank is well-positioned to take a measured approach. However, the derivatives market indicates an 80% likelihood of a significant reduction in the repo rate in August.
Debt Burden of UK Households and Companies
Source: Bloomberg.
Buy when there is blood in the streets. This fundamental principle, as old as the world itself, requires recalibration. In the current market, it may be more appropriate to say “buy while tears are flowing.” This is particularly relevant in the context of the British finance minister’s recent performance. The decline in GBPUSD quotes did in fact create an opportunity to purchase the pound at a lower price.
Keir Starmer, albeit tardily, has voiced his support for Rachel Reeves. According to the Prime Minister, the Chancellor will continue to serve in her position for many years. This led to a sense of calm in the markets and prompted investors to revert to their previous narratives.
One of them is the US dollar’s persistent weakness, which mirrors Donald Trump’s strategy to balance foreign trade and attract non-residents to US Treasuries. This stems from the cooling of the US economy and the imminent resumption of the Fed’s monetary expansion cycle. It is possible that other currencies could be vulnerable due to a slowdown in exports or GDP. The rumors about the finance minister stepping down could also be a contributing factor.
Weekly GBPUSD Trading Plan
However, it is important to recognize that global processes are irreversible. The pullback to 1.356–1.36 allowed traders to increase their long positions on the GBPUSD pair, with targets of 1.405 and 1.435. The recommendation is to hold.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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