GBP to USD Exchange Rate Plunges Despite US Political Uncertainties

July 18, 2017 - Written by David Woodsmith

STORY LINK GBP to USD Exchange Rate Plunges Despite US Political Uncertainties

Forex markets have seen volatility already this week, as the British Pound to US Dollar exchange rate reacts to disappointing US news and lower-than-expected UK inflation results. The pair is lower on Tuesday as Bank of England (BoE) tightening bets drop.

After a surge from 1.2888 to 1.3095 last week, GBP/USD briefly touched on a 2017 high of 1.31197 on Tuesday before slumping to around 1.3020.

GBP Sold as Inflation Dampens BoE Tightening Hopes

Investors sold the Pound on Tuesday in reaction to June’s UK Consumer Price Index (CPI) results, which came in short of expectations and indicated that inflation could begin to level off in the coming months after surging earlier in the year.

Year-on-year inflation was projected to remain at 2.9% in June, but instead slipped to 2.6%. Monthly inflation came in at 0% despite being forecast to only slow from 0.3% to 0.2%.

The slowing inflation was largely due to drops in fuel prices. Nick Leung from fund manager WisdomTree had this to say about the causes;

‘Today’s inflation reading is slightly softer than expected, underpinned by a combination of oil price weakness, a stabilising pound and import-cost induced inflationary pressures undermining consumers’ debt-fuelled spending power.’

While this was good news for consumers currently struggling with a pay squeeze, hawkish investors were disappointed that the Bank of England (BoE) now faced less pressure to tighten UK monetary policy within the foreseeable future.

The BoE had indicated in recent months that if inflation remains high and Britain’s economy sees resilient performance, it may be necessary to tighten monetary policy and withdraw some of the bank’s aggressive quantitative easing (QE) measures.

Speculation that this could happen is now fading, with more analysts now expecting the BoE will have an easier time arguing that policy should be kept at its current, record-low levels.

So while the lower inflation could lighten Britain’s pay squeeze problem later in the year, it has also dampened hopes of tighter BoE policies. In the short to mid-term the Pound outlook has weakened.

USD Fails to Capitalise on GBP Weakness as Political Concerns Grow

The US Dollar’s advances against the Pound have been limited this week despite Tuesday’s Sterling selloff.

A lack of success in the Republican party’s plans to repeal and replace the Affordable Care Act (ACA) with a new healthcare system has worsened concerns about Congress support of US President Donald Trump.

With Trump unable to pass one of his key campaign promises through US Congress despite a Republican majority, markets now widely doubt he will be able to pass through his ambitious plans for taxation or infrastructure.

The Republican healthcare bill hit another big roadblock on Monday evening as two more Republican senators expressed opposition to even discussing the bill, let alone passing it. Markets reacted to the news by selling the US Dollar.

Market confidence in US President Trump has been slipping in recent months. The US Dollar has been pressured by the political and economic uncertainties of the Trump administration.

Underwhelming US ecostats have also weighed on the ‘Greenback’. This week saw Empire’s July manufacturing report plunge from 19.8 to 9.8, well short of the expected 15.

GBP/GBP Forecast: UK Retail Sales Stats in Focus

Later in the week Sterling has the potential to weaken further depending on the results of Britain’s June retail sales report.

If retail activity was even worse in June than analysts forecast, traders will become more concerned that Britain’s pay squeeze is having a negative impact on Gross Domestic Product (GDP).

Analysts forecast retail sales will improve from -1.2% to 0.4% month-on-month, and from 0.9% to 2.6% year-on-year.

GBP/USD is unlikely to see much movement on Wednesday unless political news surprises investors. Any fresh developments on US Congress attempts to repeal the Affordable Care Act (ACA) could influence the US Dollar, for example.

US data is unlikely to influence the ‘Greenback’ much until next week’s Federal Reserve policy decision. However, USD could extend its gains against GBP if June housing data or jobless claims stats impress.

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TAGS: Pound Dollar Forecasts