Formation of Conservative Minority Government Dents USD GBP Exchange Rate

June 9, 2017 - Written by Toni Johnson

STORY LINK Formation of Conservative Minority Government Dents USD GBP Exchange Rate

Once the exit polls for the UK general election came in the US Dollar Pound exchange rate saw a sharp uptick overnight.

However, the US Dollar struggled to hold onto its gains against the Pound for long as markets absorbed the implications of a hung parliament.

As Theresa May was quick to form a partnership with the Democratic Unionist Party (DUP) fears of political instability eased somewhat, even though the future of the Prime Minister remains uncertain.

There has been speculation that the Conservative alliance with the DUP could encourage a softer form of Brexit, given the slim majority that the partnership offers in the Commons.

With formal negotiations due to start in a mere matter of days, however, investors are concerned that talks may prove more fraught than anticipated.

The USD GBP exchange rate could rally once again if next week’s UK consumer price index report proves disappointing.

While political developments are likely to dominate the minds of investors in the near term a bearish inflation rate could add downside pressure to Sterling.

Any weakening in inflationary pressure would give the Bank of England (BoE) further cause to leave interest rates on hold for the foreseeable future, offering investors less incentive to favour GBP exchange rates.

Despite earlier jitters over former FBI Director James Comey’s much-anticipated testimony in front of the Senate Intelligence Committee the mood towards the US Dollar improved ahead of the weekend.

The hearing failed to provoke any heightened sense of uncertainty over the future of the Trump administration, limiting any negative impact on the ‘Greenback’.

With markets confident that the Federal Reserve will raise interest rates at its June policy meeting the downside potential of USD exchange rates has remained limited.

Although, as Richard Franulovich, research analyst at Westpac, noted:

‘Even with a cautious ECB the USD index will struggle for sustained topside. Growth and inflation trends do not warrant a hawkish Fed, Republican consensus on tax cuts and infrastructure is still lacking, Russia-gate adds another impediment to the Republicans’ agenda and a debt ceiling showdown appears to be on the horizon.’

As the Fed meeting is likely to yield a dovish rate hike the USD GBP exchange rate may soften, particularly if worries over the UK political landscape have eased in the meantime.

If policymakers show signs of preferring a more aggressive pace of monetary tightening, however, the US Dollar could trend higher across the board.

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TAGS: Dollar Pound Forecasts