Pound Wobbles as Concerns Over Reeves Replacement Resurface

The UK Prime Minister had to reassure markets that the Chancellor would not be replaced, but it hasn't entirely calmed the British pound.

A Bump or a Fork in the Road?

The week for the UK economy was on positive footing, at least on the reporting front, after the . Notably, price increases in this sector of the economy, which has been carefully watched by the BOE, slowed to a rate not seen since the pandemic. However, politics intruded as an incident in Parliament left markets wondering if the rift in economic views among the ruling Labour Party would translate to Chancellor Rachel Reeves stepping down. She was , seemingly unnoticed by Prime Minister Keir Starmer, who was speaking in front of her. Her office clarified that it was a personal matter unrelated to her functions as Chancellor.

The pound and equity markets took a dip but recovered as Downing Street attempted to reassure markets that . However, the delay in addressing concerns has left markets unsettled. It's not the first time that rumours have circulated about a potential replacement for the Chancellor, who is seen as unpopular with Labour colleagues due to her fiscal rules. These are seen as reducing the government's ability to increase spending. The incident occurred immediately after the government was forced into a , which would put further strain on the budget for the next year. While intended to be reassuring, Starmer's full-throated support of Reeves might make some traders nervous that such reassurances are necessary.

Where Next for the Pound?

Earlier this week, the UK's OBR said it would likely have to , meaning fewer funds for the budget. Deficit hawks have been looking for signs that would push up UK borrowing costs, while political analysts suggest that Reeves will be forced to raise taxes in the Autumn spending plan, regardless of prior promises. Either option would be problematic for the markets and could lead to the pound weakening.

For the time being, it appears that markets are hoping the political situation is resolved, as the pound remains off its reached just a week ago. However, that was largely due to dollar weakness. What could more concretely alleviate concerns about the pound's performance and Reeves' career is definite economic growth, potentially aided by lower interest rates. Most analysts expect the BOE to cut rates twice more in 2025, with odds of a cut in August at 80%. However, MPC member Alan Traylor, who voted for a cut in June, called for three cuts, citing “demand weakness and trade disruptions”.

Cable Decline Finds VWAP Support

Price action in the cable suggests that a potential consolidation may be underway, as the 20-day VWAP bands have begun to flatten out after the pair reached 1.3800 on an overbought reading of the RSI. Following a pullback to the 1.3588 VWAP and a subsequent rejection, holding the support could send prices past 1.3812 and towards 1.3850, exposing 1.3900 and the 1.4000 handles. However, if support is lost, the autotrend levels of 1.3493/1.3500 and 1.3420 will come into the spotlight, followed by the lower VWAP at 1.3365.

Source: SpreadEx | GBPUSD

Key Takeaways

Cable has wobbled recently due to concerns over the potential replacement of Reeves, a fiscal conservative. Despite assurances from Starmer, markets remain unsettled after the government's U-turn on pension spending and warnings from the OBR about potential economic growth downgrades. Despite fuelling calls for measures to curb borrowing costs, potentially forcing Reeves to raise taxes in the Autumn spending plan, economic growth and lower interest rates could alleviate concerns and support the pound's trajectory.