Pound US Dollar Exchange Rate News: GBP/USD Softens as Political Instability and Brexit Fears Reign

June 8, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Softens as Political Instability and Brexit Fears Reign

Pound (GBP) Stutters amid Political Uncertainty

The Pound (GBP) is facing renewed headwinds today as both Brexit concerns and political chaos return. Despite Prime Minister Boris Johnson narrowly winning the confidence vote on Monday, the growing number of critics was hard to ignore.

GBP investors fear this could be the beginning of the end for Johnson’s three-year tenure, as previous ‘winners’ of no-confidence votes rarely last long after a ballot was called. Both Theresa May and Margaret Thatcher barely survived several months after winning confidence votes with larger majorities.

Meanwhile, Brexit makes another appearance as Sir Jeffrey Donaldson, the Democratic Unionist Party (DUP) leader, has met with Keir Starmer and other MPs ahead of the government’s proposed bill to abandon parts of the Northern Ireland protocol. In a statement, Donaldson has outlined why the DUP wants to see the protocol replaced:

‘Real progress is only made in Northern Ireland when there is consensus, yet the protocol was foisted upon the people of Northern Ireland despite every unionist MLA and MP opposing it.

‘The protocol must be replaced by arrangements that restore our place within the United Kingdom and the new arrangements must command the support of unionists as well as nationalists.’

If the UK goes ahead with unilaterally altering the agreement, a potential trade war could break out with the EU, hindering the Pound.

Elsewhere, the Ukraine conflict rages on and the continued grain crisis is worsening, the strain on market sentiment is likely to weigh on the Pound.

US Dollar (USD) Strengthens ahead of US Inflation

The US Dollar is remaining resilient ahead of the inflation data released on Friday as rising US Treasury yields continue to underpin the ‘Greenback’ as market moods darken.

Lending support to the US Dollar is the waning risk sentiment as fears of a global economic slowdown gather pace. Ahead of the release of China’s trade balance data, Vice Commerce Minister Wang Shouwen believes that rising global inflation will reduce consumer spending on foreign goods.

‘We must be clear about the uncertainties for foreign trade while the global economy recovery remains fragile and demand growth is still slow.’

Supporting such claims was a statement from the World Bank (WB) President David Malpass warning that faster-than-expected tightening could push developing countries into a debt crisis not seen in almost 50 years:

‘For many countries, recession will be hard to avoid. Just over two years after COVID-19 caused the deepest global recession since World War II, the world economy is again in danger.

‘Several years of above-average inflation and below-average growth are now likely, with potentially destabilizing consequences for low- and middle-income economies. It’s a phenomenon—stagflation—that the world has not seen since the 1970s.’

A continued fear of a global recession could sway investors to more safe-haven currencies such as the US Dollar.

GBP/USD Exchange Rate Forecast: UK Politics to Dampen Pound?

Looking forward, with the data calendar remaining light for the rest of the day, market movements could be dictated by political headwinds for the UK as Boris Johnson clings to his premiership.

Meanwhile, continued hawkish rhetoric from the Fed and global risk-off sentiment could lend support for the ‘Greenback’ until inflation data prints on Friday.

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