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It seems that Donald Trump’s long awaited state visit to the UK has come at the right time for the financial markets, which have stabilised during his absence from the United Sates.
In fact, the Dow Jones rallied on Tuesday by more than 300 points after Monday’s tech-driven sell-off, which came following Trump’s proposed regulation of firms including Google and Facebook.
However, the greenback has continued to show weakness during Trump’s UK visit, with the GBP/USD earning incremental gains despite continued political pessimism. But how will the Tory leadership contest impact on the markets, and how should traders prepare for the upheaval?
How the Tory Leadership Contest Could Drag down the Pound
In truth, the pound has traded in an ever-depreciating range since the shock EU referendum vote in June 2016, and it continues to remain vulnerable despite recently breaking its worst run against the Euro since the turn of the century.
This trend is expected to continue in the foreseeable future too, with a bleak economic forecast and the ongoing uncertainty created by Brexit capping the progress of the pound against both the Euro and the U.S. Dollar.
Whilst Brexit is undoubtedly hindering the UK’s short and medium-term economic prospects, it’s also creating a huge political divide within the governing Tory party. This will force Prime Minister Theresa May to leave her position shortly after Trump’s visit on the week commencing July 23rd.
So although Oanda has reported incremental GBP gains against its major rivals of late, it continues to stagger into political headwinds that are hard to navigate. As a result, it’s currently trading barely 0.5% above four-month lows and expected to fall lower as the speculation surrounding May’s replacement becomes increasingly intense.
This issue is being compounded by the diversity of candidates on offer, with some keen on securing a deal-oriented Brexit and others happier to consider leaving the EU without a withdrawal agreement in October.
Whilst both outcomes are considered far from ideal for the UK economy, a no-deal Brexit would be incredibly damaging, and the mere prospect of this happening is enough to minimise any sterling rallies in the near-term.
How Should you Prepare for this as a Forex Trader?
Whilst currency traders can leverage this uncertainty in the short-term by hedging against the pound, this is made complicated by the relative weakness of the greenback and the similarly affected Euro.
For those with a longer-term outlook, successful candidate in the Conservative leadership race will have a massive bearing on your strategy.
The overwhelming favourite from the current crop of candidates remains the former foreign secretary Boris Johnson, who would be a controversial choice and is thought to be the most likely to align with the Eurosceptic wing of the party.
This would increase the risk of a no-deal Brexit considerably, which would in turn likely send the pound plummeting to the record lows recorded in the wake of the referendum.
In this instance, hedging against the pound and investing in the USD/GBP pairing would represent a viable strategy for investors. Any subsequent trade deal between the U.S. and the UK would also be heavily stacked in favour of the former, strengthening economic sentiment in the states and driving the greenback higher.
