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GBP to USD Exchange Rate Benefits from Bets of Conservative Win

June 6, 2017 - Written by John Cameron

Forex markets continue to be generally confident that the Conservative party will win a comfortable majority in this week’s upcoming UK general election, which has helped the Pound to US Dollar exchange rate to strengthen.

After a brief dip to 1.2857 on Monday morning, GBP/USD has advanced and on Tuesday morning the pair touched on a high of 1.2943. This was the pair’s best level in almost two weeks.

A poll published by ICM and The Guardian on Monday showing an 11-point lead for the Conservative party is the main reason for the Pound’s strength this week. GBP trader confidence is also being buoyed by betting markets, which have odds of 92% on a Conservative majority.

This is despite an increasing number of polls published this week showing the Labour party gaining on the Conservative party. A poll published by Survation on Monday night puts the Tories just one point ahead of Labour.

Different methodologies among pollsters have led to very different polling figures for this year’s election.

While uncertainty about the election outcome is still high, traders seem to be generally confident in a Conservative majority regardless.
A bigger Conservative majority would be Pound positive, as it is perceived as making Brexit negotiations smoother.

However, some polls hint the Conservatives may fail to win a majority. This would mean a ‘hung parliament’ which could lead to long negotiations about whether the nation will be run by a minority government or a coalition - both weaker in power than a majority. This outcome would be a big negative for the Pound.

Sterling has been able to more easily advance against the US Dollar due to underwhelming US ecostats published this week.
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Monday saw the publication of ISM’s non-manufacturing PMI for May, which dropped further than expected from 57.5 to 56.9. US factory orders contracted by -0.2% in April as expected.

US Dollar traders are also increasingly anxious about this week’s upcoming Congress testimony from ex-FBI director James Comey. Comey was recently fired by US President Donald Trump.

Comey is expected to testify about being asked by Trump to drop an investigation into Michael Flynn, who misled Congress on his connections to Russia. Some critics have said Trump’s actions in regards to Comey amount to obstruction of justice.

If Comey’s testimony undermines Congress’ faith in President Trump in some way, the US Dollar will weaken. Concerns about US confidence and economic stability would also rise, hindering Federal Reserve interest rate hikes.

However, this will of course depend on the outcome of Thursday’s UK general election. If there is indeed a ‘hung parliament’ by the end of the week, GBP/USD could still end this week lower.
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