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GBP USD Exchange Rate Plummets on Fears of Further Government Disruption

November 13, 2017 - Written by Tim Boyer

Last week, the Pound saw a slight advance against the US Dollar.

The pairing exchange rate opened in the region of 1.3067 on Monday, later closing higher around 1.3190 late on Friday.

Pound Slumps on Fresh Political Fears

The GBP USD exchange rate has been in a sharp decline today, owing to growing concerns about the future of the current government.

The Conservative party has suffered a number of setbacks recently, including the loss of Defence Secretary Michael Fallon and Priti Patel, former International Development Secretary.

With concern about Theresa May’s progress in Brexit negotiations becoming more prevalent, the issue is that there could be a vote of no confidence against the Prime Minister.

This could be the worst possible time for such a leadership challenge, given that faith in the current administration has already been shaken since the election.

In the event that May is actively challenged for her position, the Pound could enter a straight nosedive against the US Dollar and all other peers.

US Dollar Advances after Economic Optimism from Fed’s Harker

As well as the weak Pound enabling a USD GBP rise today, the US Dollar has also risen because of US news.

Recent comments from Fed official Patrick Harker have seen voiced support for a December interest rate hike. Additionally, Harker has backed the notion that the Fed should start to unwind its vast ‘balance sheet’ of acquired bonds;

‘In the event of another shock to the system, I want our tools to be at their most effective, and in my view, that means reducing our balance sheet’.

GBP USD Volatility ahead on UK Employment Measures

The Pound has suffered against the US Dollar today and could fall further in the near-term.

As well as ongoing political developments, the Pound might be affected strongly by inflation and earnings data over the week.

UK inflation stats are out on Tuesday, while Wednesday will bring news of earnings stats, unemployment and jobless claims.

Both the base and core year-on-year inflation rates are predicted to rise, indicating higher prices for all fields even with volatile measures like fuel sales excluded.

In the immediate aftermath, such a rise in inflation could trigger a Pound advance as it would put more pressure on the Bank of England (BoE) to continue raising interest rates.

Any advance could fall flat on Wednesday, however, if UK wage growth fails to pick up.

Estimates are for a slight reduction in the pace of earnings growth with bonuses and a small rise for earnings without bonuses included.

Neither outcome is likely to reassure Pound traders about the economy, however.

With inflation hitting 3% in September and expected to rise further, wage growth in the area of 2.1%-2.2% isn’t seen as adequate.

If forecasts prove accurate, the UK’s wage squeeze conditions will continue, causing lower real incomes and a potential drop in spending activity.

With the unemployment rate not expected to change and a rise in jobless claims on the cards, this may mean that the Pound slumps against the US Dollar.

The week’s last major domestic data, retail sales stats for October, are not expected to provide much support.

Estimates are for a decline in year-on-year retail sales, with only a minimal increase in monthly sales being predicted.

Assuming that the US Dollar advances towards the end of the week, a weaker Pound could drop sharply in the GBP USD pairing.

That said, there is not a clear path ahead to US Dollar gains. The main support could come from Fed speeches, spread over Tuesday, Wednesday and Thursday.

For the US Dollar to advance on these events, Fed officials will need to give the strongest indications that a December interest rate hike is still highly possible.

Economists believe there is a strong chance of a December rate hike, but extra hints at such an outcome can only help the US Dollar.

Possibly preventing a USD advance will be US inflation and sales figures on Wednesday.

Forecasts are for a slowdown in year-on-year inflation in October, as well as a slump in retail sales during the same month.
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