GBP Strength at Risk From Political Turmoil

GBP price, news and analysis:

• GBP has been outperforming even a firm US Dollar over the past few sessions, with EUR/GBP falling steeply.
• That’s despite a row over second jobs for members of the UK Parliament and sleaze allegations centering on the ruling Conservative Party that could weaken the Pound longer term.

GBP at risk from political concerns

Domestic politics tend to have only a long-term influence on currency rates and not to affect near-term trends. However, GBP traders still need to keep a wary eye on a growing row over second jobs taken on by members of the UK Parliament and sleaze allegations centering on the ruling Conservative Party.

Even though the US Dollar has been climbing steadily since Wednesday last week on strong economic data that have brought closer a tightening of US monetary policy by the Federal Reserve, the Pound has been even stronger as a rate increase by the Bank of England on December 16 becomes ever more likely.

This all-round Sterling strength can be seen especially in crosses like EUR/GBP:

EUR/GBP Price Chart, One-Hour Timeframe (November 4-18, 2021)

Source: IG (You can click on it for a larger image)

However, the advance in GBP looks to be running out of steam now, with a UK rate increase priced in. Moreover, the Conservatives are suffering in the opinion polls despite MPs backing government plans to prevent them from taking on certain jobs in addition to their work in Parliament – plans forced on Prime Minister Boris Johnson by claims of sleaze.

Against this background, several opinion polls over the past few days have shown the opposition Labour Party ahead of a Conservative Party that is widely seen as more market-friendly.

Sentiment data bearish for EUR/GBP

Turning to the near-term prospects for GBP, there are few indications yet that its strength may soon ebb away. IG client sentiment data for EUR/GBP, for example, show that 77.28% of retail traders are net-long, with the ratio of traders long to short at 3.40 to 1. The number of traders net-long is 19.34% higher than yesterday and 55.22% higher than last week, while the number of traders net-short is 3.88% higher than yesterday but 45.13% lower than last week.

Here at DailyFX, we typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/GBP may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/GBP-bearish contrarian trading bias.

— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex