Pounds jumps as Javid resignation indicates potential fiscal boost
The Pound moved higher yesterday following the announcement that Sajid Javid (Chancellor of the Exchequer) had resigned as Boris Johnson reshuffled his cabinet.
News of his resignation initially led to a downtick in Sterling, although this was short-lived after the UK government announced that Rishi Sunak would be his replacement. This led to a spike in the Pound as Sunak is believed to be supportive of fiscal stimulus (e.g. increased public spending/less austerity) which means there would potentially be a boost to economic growth.
Traders are therefore assuming this could reduce the pressure on the Bank of England to cut interest rates which has made the Pound more attractive to some investors. Any pronounced Pound rallies based on these assumptions, however, could be on built on weak ground as Brexit uncertainty is likely to dominate Pound sentiment. For any long-term, sustained Pound rallies, the market will need some evidence that the upcoming Brexit trade negotiations are going well and that a deal (or extension) seems likely.
As a result, the Pound has moved above some key resistance levels. The GBP/EUR bounced around 1% and trades around a 2-month high. The GBP/USD moved to a 10-day high after traveling around 1% higher. From a technical perspective, it will be important to see if the Pound can keep hold of these gains into the weekend close. A move back below some of these key resistance levels may indicate this was short-lived rally.