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Pound US Dollar Exchange Rate Slumps to November Low as UK Ministers Quit on Brexit Deal

November 15, 2018 - Written by David Woodsmith

For weeks, analysts had suggested that the Pound could surge when UK-EU Brexit negotiators finally reached a deal. However, when that deal was reached this week, UK political uncertainties flared up as ministers began to resign in opposition of the deal. This left the British Pound to US Dollar (GBP/USD) exchange rate plunging.

Since opening this week at the level of 1.2973, GBP/USD has fluctuated with both the Pound and US Dollar weaker. GBP/USD briefly advanced in the middle of the week as the Brexit bill progressed, before plummeting around a cent on Thursday. At the time of writing, GBP/USD trended near a weekly low of 1.2767.

GBP Slumps as UK Ministers Quit in Protest of Brexit Deal

The Pound saw one of its sharpest falls in months on Thursday, as despite confirmation that an emergency UK-EU Brexit summit would be held by the end of the month, Brexit fears only worsened amid domestic political developments.

Analysts had previously predicted that when a UK-EU Brexit deal was finally reached by negotiators, the Pound would surge.

Instead, some members of UK Prime Minister Theresa May’s government cabinet resigned in protest of the agreed deal – including the now ex-Brexit Secretary Dominic Raab.

Other cabinet ministers and MPs resigned from their government posts following Raab’s resignation.

The stream of resignations worsened concerns that UK Prime Minister Theresa May could be about to face a vote of no-confidence or a leadership challenge.

With UK political uncertainties already high due to fears about whether the Brexit process will succeed or fail, the possibility of leadership uncertainty could cause even further market uncertainty and panic.

The Pound’s reaction to the news dominated market movement on Thursday and analysts said there may be more to come.

According to Craig Erlam from Oanda:

‘The Pound is coming under considerable pressure in response to the resignations and a potential leadership challenge, plunging around 1.5% against the Dollar, Euro and Yen and looking vulnerable to further declines. The old saying that it never rains but it pours couldn’t be more true this morning, with the October retail sales data providing the icing on the cake, recording a second consecutive decline and falling well short of expectations.

I don’t expect any easing up in Sterling volatility today, with the resignations potentially coming thick and fast.’

Sterling’s losses were only compounded by Britain’s October retail sales results, which fell well short of expectations when they were published on Thursday.

USD Benefits from Weakness in Rivals despite Rising Risk-Sentiment

The US Dollar has been less appealing this week, as investors sold the currency from its best levels in profit-taking while market risk-sentiment rose.

Investors have been more willing to take risks in recent sessions, as US data has been generally unsurprising and speculation rises that the US and China could be closer to beginning positive negotiations regarding trade.

One of the primary causes of US Dollar demand in recent months has been safe haven demand, amid concerns about escalating trade actions between the US and China.

Signs that the nations were becoming more willing to discuss trade issues bolstered hopes that tensions could eventually de-escalate.

This week’s US data hasn’t done much to bolster US Dollar support either. Wednesday’s US inflation rate generally showed price pressures rising as expected, but the yearly core inflation rate fell slightly short of expectations.

The slip in inflation was not notable enough to have a major impact on Federal Reserve interest rate hike bets.

GBP/USD Forecast: UK Political Developments to Dominate Currency Markets

Analysts expect that the Pound could remain highly sensitive and volatile to any and all developments regarding the UK government and Brexit process until things begin to notably calm.

As UK government ministers resigned, with some MPs even sending in letters of no-confidence in UK Prime Minister Theresa May, the Pound outlook continued to become even murkier throughout Thursday’s session.

If there are not enough letters to achieve a leadership challenge or if Prime Minister May appears likely to win a potential challenge, Sterling’s selloff may be limited.

However, as even a leadership challenge itself could significantly impact Brexit proceedings it would still leave investors anxious that the Brexit deal will fail to reach UK law, potentially leading to a ‘no-deal Brexit’.

US industrial and manufacturing production stats, due Friday afternoon, could cause some late-week US Dollar movement if they surprise. Otherwise though, Brexit developments and risk-sentiment will drive the Pound to US Dollar exchange rate.
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