GBP/USD: Breaches 1.30 on Hopes of UK Fiscal Stimulus

The British pound is up against the US dollar on Thursday afternoon following the shock news that Richi Sunak will replace Sajid Javid as UK Chancellor of the Exchequer, potentially paving the way to higher government spending.

GBP/USD was higher by 73 pips (+0.56%) at 1.3032 with a daily price range of 1.294 to 1.305 as of 2pm GMT. The currency pair was edging higher in early trade but spiked higher, taking out the key 1.30 level. The weekly gains now amount to 1.07%.

Two months after Prime Minister Boris Johnson led the Conservative Party to a landslide election victory with a majority of 80 seats in the house of commons, he has been conducting a reshuffle of his cabinet, the members of parliament that form the government.

Rather shockingly, having been the only minister who had been guaranteed to keep his job, Chancellor Sajid Javid resigned. The Chancellor is probably the second most important minister in government after the Prime Minister, and arguably the most important for markets because he controls the country’s finances.

After initially falling, the pound rallied on the news, seemingly concluding that Javid’s replacement Richi Sunak was likely to increase government spending more than his predecessor. While Javid and his team at the Treasury have trying to push for more ‘conservative’ spending plans, that came into conflict with Prime Minister Boris Johnson’s “levelling up” agenda of increasing spending to raise living standards outside of London and the South East.

Broad USD strength overcome by GBP surge

The dollar has been benefitting from a rise in US inflation. According to figures just released, US CPI rose to 2.5% in January, up from 2.3% in December and above forecasts for 2.4%. While the Federal Reserve have been touting the possibility of easing monetary policy because of the coronavirus, rising US inflation makes that a trickier task. Lowering interest rates encourages individuals and businesses to take out bank loans, which increases economic activity as well as the money supply, which typically means higher inflation.

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