UK political crisis weighs on sterling PM Johnson's outlook

GBP/USD fluctuated and fell this week, mainly affected by the strong USD, and the British political crisis put pressure on GBP. But expectations of a rate hike by the Bank of England next week capped sterling's decline. Although British Prime Minister Jensen survived a no-confidence vote this week, there are fears of political instability in the UK. Put pressure on the pound.

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The U.S. Commodity Futures Trading Commission’s CFTC foreign exchange business position report shows that as of the week of 2022-06-07 (hands), the long positions of GBP/USD decreased by 2,044 lots to 191,742 lots. Sterling fell 1.43% to $1.2310, its second straight weekly loss, as Britain's gloomy economic outlook made investors nervous.

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Sterling continues to be affected by economic data and expectations of a rate hike by the Bank of England. Market participants remain concerned about the outlook for the UK economy, with persistently high inflation exacerbating the risk of stagflation. Inflation jumped to 9% in April, the highest level since 1982, as prices for electricity, natural gas and motor fuel rose. Signs of a further increase in inflation could continue to undermine confidence in the UK's economic recovery, limiting upside for the pound. On the economic data front, investors focused on the final May services PMI for further insight into the health of the UK economy.

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Sterling is likely to fall as the Bank of England is unlikely to meet market expectations for a sharp rate hike. "Although the UK economy has shown signs of deterioration, the market is still pricing in expectations that the Bank of England will actively tighten monetary policy," said Roberto Mialich, a foreign exchange strategist at UniCredit, in a note. The key rate was raised by 25 basis points to 1.25%, and then to 1.50% in August, but rates will remain steady thereafter, while the market expects at least four more hikes of 25 basis points each after June. UniCredit sees GBP/USD falling below 1.20 in the medium term and EUR/GBP rising above 0.95 in the medium term.

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Money market pricing shows the Bank of England will raise interest rates by a cumulative 100 basis points through September, almost double what it expected six months ago. This reflects market expectations that the Bank of England will raise rates by 25 basis points twice and by 50 basis points once in the next three policy meetings. It would be the largest rate hike since the Bank of England was granted independent policy-making authority in 1997, signaling that policymakers are under increasing pressure to accelerate the tightening cycle that began late last year.

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Johnson won a vote of no confidence in his party by 211 votes to 148 on Monday night, allowing him to remain as prime minister for the time being. But his party approval ratings were much lower than expected. Foreign media believe that Jensen's "miserable victory" may be the "beginning of the end" of his leadership. Jensen's narrow victory raised questions about whether he might be forced to abandon some of his more controversial policies. Although Jensen narrowly passed a vote of confidence, more than 40% of MPs opposed him, a result that seriously weakened Jensen's strength.

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The government still hopes to push the bill through the House of Commons before parliament adjourns at the end of July, people familiar with the matter said. Even so, it may not become law for a year, as it is expected to face a backlash from the upper house. One risk to Jensen is that the plan could exacerbate divisions within the party. While taking a tough stance on the EU is toying with Brexiteers in their party, for some lawmakers, tearing up Jensen's deal with the EU is a red line.

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Jensen expressed his gratitude to his colleagues for their support, saying that it is now necessary to unite in the name of the Conservative Party and can focus on helping the British people; this gives the UK an opportunity to continue to strengthen the economy, and the government must help people maintain their lives. In addition, British Prime Minister Jensen refused to rule out the possibility of an early election.

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While Jensen's victory means he won't be challenged again for a year under current party rules, he's not necessarily out of the woods: his predecessor Theresa May in a similar vote in 2018 Survived, with greater advantages, but resigned a few months later.

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After maintaining a narrow range in the upper rail range of the Bollinger Bands indicator channel in the short term, the bearish momentum waited for an opportunity to enter the market, fell sharply, fell below the lower rail of the Bollinger Bands indicator to a node near 1.23043, and then sorted out. The short-term bearish momentum continued to decline, and the Bollinger Bands indicator showed a downward trend. After closing the trend, it began to slowly open its mouth. The top suppresses the node near 1.26053, the low support pays attention to the node near 1.21274, and the turning point near 1.23974. The MACD indicator is at the 0 axis and starts to show signs of downward movement after hovering in a weak position. The RSI indicator is in a narrow range near the 50 equilibrium line. After that, it started to fall, as shown in the figure:

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