GBP Shoots Higher On UK Finance Minister Javid Resignation
GBPUSD shot back above the 1.30 level on the news that former UK Chancellor of the Exchequer Sajid Javid had resigned. Javid has already been replaced by Conservative MP Rishi Sunak.
The move comes as part of a wider cabinet reshuffle that had in the works behind closed doors since last November. Javid had long been seen as potentially on the chopping block, due to alleged “strategic disagreements” with Johnson and his top advisors (Dominic Cummings). Indeed, Javid has come across more reluctant to turn on the fiscal spending taps than PM Johnson in recent months.
Reportedly, Javid was actually given the option to stay on as chancellor so long as he replaced all of his advisors with those chosen by number 10. Javid reportedly said “what self-respecting minister could accept such an offer” prior to resigning.
No. 10 must have known Javid wouldn’t accept the offer, and by the looks of it, were instead attempting to force him and his advisors out to take full control of UK government finances. Indeed, new Chancellor of the Exchequer Sunak is widely expected to “play ball”. PM Johnson and his closest advisors will be well and truly “pulling the strings” now.
Seeing as PM Johnson wants to spend more money on ambitious infrastructure projects and the new Chancellor of Exchequer will likely do as he is told, today’s reshuffle in the Exchequer is being seen increasing the odds of a looser fiscal policy down the line.
Hence the GBP bounce.
To put things simply; more government spending = higher economic growth = GBP positive.
The increased odds of higher fiscal spending is also evident in the Gilt market reaction (the market for UK government debt), which sold off.
Why? Higher government spending = more debt = higher supply of debt = lower prices (thanks to the laws of supply and demand).
We have also seen a slight repricing money markets reflecting a lower probability of BoE rate cuts later this year. The prospect of increased fiscal spending was a key reason why the BoE decided to be patient instead of cutting rates in January. Should spending increase, this should support the UK economy going forward and further reduce the need BoE easing.
To put things simply; more government spending = higher economic growth = higher inflation = less need for the BoE to lower rates = also GBP positive.
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