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The British pound was frail on Tuesday after the departure of two key euroskeptic ministers raised worries about a “hard Brexit” while the yen retreated against the dollar as investors bid up riskier assets. Sterling stood at $1.3248, having fallen to as low as $1.3189 on Monday, after Prime Minister Theresa May’s foreign minister and Brexit negotiator quit in protest at her plans to keep close trade ties with the European Union.
The currency regained some ground after several Conservative lawmakers said May is likely safe from a leadership challenge despite the resignation of Boris Johnson and Brexit minister David Davis. Still, after two years of wrangling, their departures shatter May’s own proclamation of cabinet unity last Friday in what she believed was an agreement on Britain’s biggest foreign and trading policy shift in almost half a century.
Simon Derrick, London-based chief currency strategist at BNY Mellon, said the next few weeks could prove decisive, noting that financial markets have a poor track record of pricing in UK political risks, not to mention the 2016 Brexit referendum. Current thinking is that May would win a party confidence vote. However, there is a risk that were May to make further compromises in the negotiations with Brussels, more hard line Conservative MPs might be theoretically prepared to abstain or even vote against her in a no confidence vote in Parliament,
Markets still expect it is likely the Bank of England will hike rates at its next policy meeting on Aug. 2, but analysts said a full-blown political crisis could dent those expectations. Uncertainty is conquering the market at the moment regarding the possibility of a rate hike in August.
If there were some negative comments about a possible rate hike from BOE officials ahead of the August (Monetary Policy Committee meeting), then we will see a big fall in sterling,
Trade Suggestion Buy GBP/USD At: 1.32780, Take Profit At: 1.33105, Stop Loss At: 1.32357