GBP/USD – Pound Breaks Above 1.30 as Theresa May to Become Prime Minister

The British pound suffered sharp losses last week, as GBP/USD slid some 350 points. This week has started on a positive note, as the pair has posted gains on Monday. GBP/USD is trading slightly above the 1.30 level in the North American session. In the UK, the Conservatives have chosen Home Secretary Theresa May to replace Prime Minister David Cameron. On the release front, it’s a very quiet start to the week. The sole US event on the schedule, the Labor Market Conditions Index, posted a decline of -1.9 points. Later in the day, The UK will release BRC Retail Sales, a consumer spending indicator. On Tuesday, BoE Governor Mark Carney will appear before the Treasury Select Committee and answer questions about the Financial Stability Report, which was released last week.

Britain took an important step to restoring political stability, as Home Secretary Theresa May has won the race to replace David Cameron as Prime Minister. May remained the sole candidate for the Prime Minister position after Energy Secretary Andrea Leadsom withdrew from the race. May is expected to take over as British Prime Minister on Wednesday, when Cameron will resign. May was a strong supporter of the Remain camp, but she will now be mandated with presiding over Britain’s exit from the European Union, which could be a protracted and messy affair. The UK may have voted “Leave”, but there is no timetable as to when the exit will take place or what type of trade agreement will define the new economic relationship between the EU and Britain. The Brexit vote to leave the EU has caused political and financial turmoil in Britain and sent the pound reeling – GBP/USD has lost about 12 percent of its value since the vote on June 24.

US employment numbers were generally positive on Friday, led by the key Nonfarm Employment Change report. The indicator surged to 287 thousand in June, crushing the estimate of 175 thousand. This followed a dismal reading of 37 thousand a month earlier. There was further encouraging news as the work participation rate improved, following two straight declines. At the same time, Average Hourly Earnings remains weak, as the wage growth indicator posted a weak gain of 0.1%, shy of the forecast of 0.2%. The unemployment rate rose to 4.9%, above the estimate of 4.8%. On Monday, the Labor Market Conditions Index, a minor event, declined 1.9 points, marking its fifth straight decline. The employment picture remains solid, but weak wage growth continues to be the Achilles heel of the US labor market.

There were no surprises in the Federal Reserve minutes, released last week. In the June policy meeting, policymakers expressed concerns about a slowdown and hiring and the health of the US economy, and the underlying tone was one of prudence and caution. The June meeting took place just one week before the Brexit referendum vote, and in the minutes showed that Fed policymakers adopted a “wait and see” attitude about Brexit. The vote by Britain to leave the EU stunned the markets, causing turmoil in the markets and sending bond yields to record lows. The minutes indicated that Fed members projected two rate increases before the end of the year, but that forecast is likely out-of-date following the shock waves from the Brexit earthquake. Given the current economic climate, the markets are pessimistic about any rates moves before 2017. Investors have priced in no chance of a rate increase at the next Fed meeting on July 26-27, and just an eight percent chance of a hike in 2016. However, if US employment and inflation numbers improve in the second half of the year, the likelihood of a rate hike will certainly increase.

GBP/USD Fundamentals

Monday (July 11)

• 10:00 US FOMC Member Esther George Speaks
• 10:00 US Labor Market Conditions Index. Actual -1.9
• 19:01 British BRC Retail Sales Monitor

Upcoming Key Events

Tuesday (July 12)

• 5:00 BoE Governor Mark Carney Speaks

* Key releases are in bold

*All release times are EDT

GBP/USD for Monday, July 11, 2016

GBP/USD July 11 at 11:45 GMT

Open: 1.2941 Low: 1.2849 High: 1.3018 Close: 1.2987

GBP/USD Technical

• GBP/USD was flat in the Asian session. The pair posted sharp losses in the European session but then rebounded. GBP is showing limited movement in North American trade
• 1.2840 is providing strong support
• 1.2991 was tested in resistance earlier and is fluid. It could break in North American trade

Further levels in both directions:

• Below: 1.2840, 1.2720 and 1.2612
• Above: 1.2991, 1.3064 and 1.3142
• Current range: 1.2840 to 1.2991

OANDA’s Open Positions Ratio

GBP/USD ratio is showing long positions with a slight majority (53%). This is indicative of slight trader bias towards GBP/USD continuing to move higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.