Pound Has Been Under Pressure
GBP has been under increasing pressure over recent months as the uncertainty around the Brexit outlook increases.
This uncertainty is being driven by the Conservative party leadership contest which is currently underway in the UK. The winner of the leadership contest will take over from Theresa May as the new Prime Minister.
Johnson Promises Brexit By Halloween
The two candidates in the final stages of the contest are Boris Johnson and Jeremy Hunt.
Both candidates have said that they support the decision to leave the EU and are firmly intent on delivering Brexit.
However, the key difference is that Boris Johnson, the favorite to win, has vowed “do or die” to take the UK out of the EU by the current deadline of Halloween.
This means that he is perfectly happy for the UK to leave without a deal, rather than extend the current situation any further. And Johnson has stated this several times, leaving no doubts surrounding his position on the matter.
Hunt Says Brexit Might Take Longer
Hunt, on the other hand, says that he is “being honest” with the public by declaring that he cannot guarantee Brexit by Christmas.
Explaining the situation, Hunt said:
“The reality is that we face a hung parliament with people – not just in the Labour Party but in our own party – absolutely determined to stop us leaving without a deal.”
Voting among the Conservative Party’s 180,000 members began on the 6th of July. And the deadline for ballots to be returned is the 21st of July.
Risk Of “No Deal” Brexit Increasing
With a few days to go and Johnson still the favorite to win, the chances of a no-deal Brexit have dramatically increased.
Consequently, GBP has been under heavy selling pressure moving from highs of nearly 1.32 in May to lows below January’s flash crash.
Meanwhile, the threat to the UK economy from a no-deal Brexit will remain a heavy worry for investors and businesses until the results of the election either clarify or dampen the outlook.
UK Facing Highest Recession Risk Since 2007
A recent study carried out by the Resolution Foundation warns that the UK is facing its highest risk of recession since 2007. This is both as a result of Brexit uncertainty and the global economic slowdown.
This follows on from the National Institute of Economic Social Research, warning that the UK might barely avoid entering a technical recession over Q3 following a contraction of 0.1% in Q2.
BOE Warns of Rising “No Deal” Brexit Risks
Over recent months, the Bank of England has consistently warned of the dangers of a no-deal Brexit and the rising risk of it taking place.
And with Boris Johnson leading the race, these risks are clearly sky-rocketing.
At its latest meeting, the BOE warned that a no-deal could force the bank to cut rates to backstop the economy and prevent a recession. Speaking last week, BOE policymaker Gertjan Vlieghe said that rates could be cut to close to 0% following a no-deal.
Such a move would be heavily bearish for GBP. In fact, we could see a slide similar to the one we saw in response to the BOE’s emergency rate cut in August 2016 after the initial Brexit referendum shock.
GBPUSD continues to trade within the bearish channel which has framed price action since the 1.3380s 2019 highs in March. Price recently tested and held the major 1.2380 level support, which is the current 2019 low. For now, price remains below the 1.26 level resistance and while within the bearish channel, focus remains on further downside with 1.2355 the next level to watch. Bulls will need to see a break above 1.2769 resistance and the bearish channel top to alleviate the near term bearish bias.