UK Pound Struggles Amid Potential PM Replacement

The GBP/USD pair has maintained choppy performance on Thursday with the US dollar seeing a mixed reaction to weaker than expected initial jobless claims and housing data, though the pair has for the most part remained well supported to the north of the 1.3600 level.

At current levels in the 1.3620s, cable looks on course to post an on-the-day gain of about 0.1% or roughly 20 pips. The sterling continues to shrug off Westminster noise surrounding the potential ousting of Boris Johnson from his position as UK Prime minister. His potential replacements, such as UK Chancellor Rishi Sunak (who is the front-runner to replace him), would be unlikely to mark a significant shift in economic policy.

Friday’s UK December Retail Sales report is the only remaining significant data of note this week. The data is unlikely to dissuade market participants from pricing in a high likelihood that the BoE hikes interest rate by another 25bps on 3 February in the wake of this week’s strong UK labour market data and hotter than expected inflation data.

The said data is sufficient to keep pound supported until the end of the week, but traders should also note that the US dollar also faces upside risks in the coming days as traders await next week’s Fed meeting. The US central bank is expected to endorse money market pricing for as many as four rate hikes in 2022 and give the green light to a rate hike as soon as March.

It may thus prove difficult to trade GBP/USD based upon central bank divergence. A better play might be to see GBP/USD in the short-term as more of a guage for risk appetite, given sterling risk-sensitive properties.

After the major US tech index the Nasdaq Composite fell into “correction” territory on Wednesday (i.e. more than 10% down from a recent high), Thursday has seen some stabilization (aided by more monetary policy easing in China). If stocks continue to stabilize/tentatively recover in the coming days, GBP/USD may be able to move back towards a challenge of 1.3700.