- Pound closes the week 1.22% higher
- UK Chancellor Javid quits after refusing PM Johnson’s request to remove his advisers
- Analysts believe that the new Chancellor Sunak will allow a more aggressive fiscal stimulus
The pound recorded a positive week against the dollar as it managed to erase around half of the prior week’s losses. Investors were aggressively buying the pound after the UK Chancellor Sajid Javid resigned.
Fundamental analysis: Sunak to replace Javid
UK Chancellor Sajid Javid resigned after he refused a request from the PM Johnson to fire all his advisers if he is to keep his position. The position of the Chancellor of the Exchequer in the UK government is the equivalent of the Minister of Finance and Budget in other countries, and it is considered to be the second most powerful post after the Prime Minister.
“My sense is the market is anticipating a chancellor happier with more expansionist fiscal policy. With monetary policy potentially reaching its limits and the possibly larger government spending ahead, the pound would certainly benefit,” said Neil Jones, head of currency sales for financial institutions at Mizuho Bank.
The pound jumped higher in the aftermath of Javid’s decision, as analysts believe that Sunak will create fewer obstacles for Johnson and be open toward the policy of fiscal stimulus, more precisely aggressive investments in the public infrastructure.
“The initial reaction has been weaker sterling but we are now seeing a rally to a new high. This is presumably the market interpreting the announcement as Boris Johnson wanting advisors who are more willing to back aggressive fiscal stimulus,” said Adam Seagrave, head of global sales trading at Saxo Markets.
Media has been reporting that there was an internal war ongoing within the British administration over the new budget. It seems that the war has now ended after Javid resigned. On the other hand, Sunak is seen as being extremely close to PM Johnson, as some analysts describe him as Johnson’s “favourite Minister”.
Technical analysis: Bulls fight back
Following the news concerning Javid’s resignation, the pound gained nearly 80 pips on Thursday to close the week 1.22% higher. The closing price on Friday has been especially important as the pound managed to close above both moving averages on the weekly chart, above $1.3040.
GBP/USD previously stopped its descendance around $1.2880, where the 100-DMA (the red line) is located. Moreover, this week’s push higher forced a close above the ascending trend line (the purple line), setting up a positive base for the pound bulls to continue moving higher in the coming days and weeks.
UK Chancellor Sajid Javid resigned on Thursday after he declined the PM Johnson’s request to sack his advisers. The new Chancellor, Rishi Sunak, is considered to be much closer toward Johnson’s views, as investors believe that the government reshuffle will be more inclined toward an aggressive fiscal stimulus.