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UK Crisis: What the next Prime Minister means for the British pound

May 28, 2019 11:09

UK Prime Minister Theresa May has finally called time on her tenure by announcing her resignation on June 7. After three years on the job - the failure of delivering Brexit, losing the confidence of her own party and a disastrous result in the European Parliament elections - the race for the UK's top political spot is wide open, creating some very interesting trading opportunities.

Brexit GBP/USD

In this article, we explain who the next Prime Minister could be and what it could mean for the British pound, as well as the possible trading opportunities around this once in a lifetime event. Let's get started!

Who will be the next Prime Minister?

Theresa May's Tory party (a.k.a the Conservative and Unionist party) only won 9% of the vote in the recent European Parliament elections, creating an 'existential threat' to the government currently in charge to deliver Brexit and lead the country. As the new Brexit party - only six weeks old and led by Nigel Farage - shocked the establishment by winning 32% of the vote, choosing the next Prime Minister is now hugely important to the Tories as it is to the British pound.

Candidates who have officially declared their intent include:

  • Michael Gove, Environment Secretary.
  • Matt Hancock, Health Secretary.
  • Jeremy Hunt, Foreign Secretary.
  • Boris Johnson, Backbencher.
  • Andrea Leadsom, former leader of the House of Commons.
  • Esther McVey, Backbencher.
  • Dominic Raab, Backbencher.
  • Rory Stewart, International Development Secretary.

Boris Johnson is the current favourite to take the top spot as he announced his intention just hours after Theresa May resigned stating: "We will leave the EU on October 31, deal or no deal… The job of our next leader has to be getting the UK properly out of the EU, putting Brexit to bed."

The final choice of the new Tory leader will be decided by 100,000 party members of which 75% support a no-deal Brexit, suggesting the odds are highly in favour of the UK crashing out of the EU without a deal in place. What does this mean for the British pound?

Why are traders are dumping the British pound?

When viewing the long-term price chart of the British pound against the US dollar (GBP/USD), it is clear to see that - overall - traders and investors have remained bearish (or negative) on the pound.

Source: Admiral Markets MT5 Supreme Edition, GBP/USD, Monthly - Data range: from Dec 1, 2001, to May 27, 2019, accessed on May 27, 2019, at 2:04 pm BST. - Please note: Past performance is not a reliable indicator of future results.

In the above price chart of GBP/USD, it is clear to see that - in the long-term - traders have been swapping their pounds in favour of the US dollar. In fact, prices have remained depressed for so long that GBP/USD has been trading below the 50 period moving average (denoted by the red wavy line on the chart). Moving averages help traders identify the overall trend of a market. If prices trade below a moving average it is considered a bearish sign.

While prices have pushed higher in several instances, overall the currency pair has remained bearish before and after the UK voted to leave the EU. And, with the Tory party now in trouble of losing out to rival parties promising to deliver Brexit, it's likely that any new Tory Prime Minister will make leaving the EU without a deal a top priority.

According to investment bank Nomura, this development is not good for the British pound stating that any rise in the currency will "probably end up being a gift for those who are considering fresh shorts". So what are the possible trading opportunities? Let's take a look!

How to Trade GBP/USD Volatility

While GBP/USD is already trading below its 31-year low, the technical price chart shows there is still some more room left to the downside:

Source: Admiral Markets MT5 Supreme Edition, GBP/USD, Daily - Data range: from Aug 3, 2018, to May 27, 2019, accessed on May 27, 2019, at 2:22 pm BST. - Please note: Past performance is not a reliable indicator of future results.

In the daily chart above, it is clear to see the recent downside weakness in GBP/USD. However, over the long-term, the currency has been held in a trading range between two horizontal resistance and support lines around 1.3300 and 1.2500.

Short-term traders may consider trading any continued weakness in the GBP/USD down to the 1.2500 price level. If there is no buying appetite at this level, then the level could break and see the currency pair fall down to the next major support level at 1.1930.

However, as the move lower is relatively strong, the daily chart is not producing many price action based signals which are commonly used by traders for entry and stop loss levels. Therefore, some traders may consider viewing the lower timeframes to identify possible trading opportunities such as the 4-hour chart, as shown below.

Source: Admiral Markets MT5 Supreme Edition, GBP/USD, H4 - Data range: from Apr 8, 2019, to May 27, 2019, accessed on May 27, 2019, at 2:36 pm BST. - Please note: Past performance is not a reliable indicator of future results.

The yellow coloured boxes in the 4-hour chart above highlight a popular price action based signal called an 'engulfing candle'. In this instance, the examples highlighted are 'bearish engulfing candles'. This is where the buyers push the market higher and above the previous candle's high. However, it is a trap as sellers are waiting to push the market back down all the way below the previous candle's low. It represents a significant shift in sentiment.

In most cases - but not all - the market did go on to weaken. Through using stop-loss orders traders can minimise their risk in case of any moves against the direction of their trade. Using a trading calculator can be very useful in these instances.

Conclusion

Major political events are coming to the UK. In the past, this has often created large price movements in GBP/USD. Could it do so again? And if so, how will you be trading it?

If you're feeling inspired to start trading, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that Admiral Markets provides the ability to trade with Forex and Contracts for Differences on up to 80+ currencies, with the latest market updates and technical analysis provided for FREE! Click the banner below to open your live account today!

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