Last week was a really bad week for the pound. It fell by almost 3% last week on the heels of a really ineffective conservative party conference. It also made people have the view that Theresa May will not survive a leadership challenge.
This week also looks set to be an important one for the pound. There is political backstabbing going on as well as some really important manufacturing data that is set to hit the wires. There could also be changes in May’s cabinet.
No doubt, one of the most important questions for the market is where Theresa May stands and how the market will react to her weakened position.
Indeed, Theresa May told reporters on Friday that she had the full support of her cabinet. This seems to be in contradiction to another report by a Tory member that at least 30 MPs had reservations about her leadership.
There are also rumours that may will reshuffle this cabinet after a meeting in Brussels on Oct 19-20. If May was somehow able to stave off any amounts of rebelling then the pound is most definitely likely to recover next week.
As the Brexit talks are meant to roll on next week, the volatility in the pound shot up to levels it has not seen for the past few weeks. Hence, the investors are seeing that there is more scope for volatility and instability in the pound over the next week.
The market is also interested in hearing any more information from the bank of England on the whether there will be a rate hike in November. Once the data from this week hits the wires, the market is likely to get the most information on how likely that is to be. The key numbers to watch are the house prices and industrial production.
According to some strategists, the moves by the bank to always claim that rates would be hiked if there was enough reason and then never took action is not the best route to take. If the central bank then decides yet again that they will not be hiking then there could be a permanent adjustment in market expectations and sterling could fall quite badly.
This increasing volatility in the pound can either be traded directly with Forex CFDs or one can trade options on the GBP/USD. The latter has less risk as there is only a premium that is staked on the trade and this is the maximum that can be lost. There are any number of regulated UK option brokers for you to choose from if you want to enter a position.
Rumours Johnson to go?
While there is reasonable focus on whether Theresa May will hold onto her position over the coming few weeks, the most likely to see an exit is the foreign minister, Boris Johnson.
There are a number of Tory MPs who think that May should make a move on Boris given his lone ranger attitude to the Brexit negotiations. There was further indications that something could occur when May was asked about Johnson by the Sunday Times.
She said that it has never been her style to hide from a challenge and that she should have the best people in her cabinet. This could be a tacit indication that something could be coming for Boris Johnson.
Where is the Pound Going?
No doubt the pound is in for a tough next few months. There are a range of issues from Brexit to economic data that could have an impact on the currency. Hence, the trader should take caution when placing any positions.
Of course, the most volatility in the currency will come around the announcement of the data points. If the data is weak then there could be an indication that the BOE is unlikely to raise interest rates. This could lead to a fall in the currency. Of course, on the flip side if the data is not that bad then we could see an increase in interest rates and a corresponding rise in the value of sterling.
You should also keenly watch the news out of the Brexit negotiations. If it looks likely that the UK is to face more domestic political dramas then the chances of a good Brexit deal will start to fall and likely to lead to the prospect of a “hard brexit”. If this becomes that much more probable then we will see the pound continue to fall.