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GBP/USD Edges Away from Worst Levels on UK Prime Minister Reassurances

November 16, 2018 - Written by Ben Hughes

Due to a combination of political turmoil in Britain, as well as some solid US data, the British Pound to US Dollar (GBP/USD) exchange rate plummeted on Thursday. Friday saw the pair rebound just slightly as markets cooled – but many analysts believe that this may be just the beginning of the Pound’s late-year political woes.

After opening this week at the level of 1.2975, GBP/USD fluctuated around the week’s opening levels until Thursday. When a chain of resignations from the UK government began and letters of no confidence in UK Prime Minister Theresa May began to come in, GBP/USD plummeted over two cents and fell to a November low of 1.2738. GBP/USD trended near the level of 1.2801 at the time of writing.

GBP Volatility Intensifies as Investors Await UK Political Developments

Thursday was a highly eventful day for markets, as Pound volatility intensified to very high levels amid broad fears about how the Brexit process will unfold if the UK government remains fissures.

UK Prime Minister Theresa May’s negotiated Brexit plan failed to unify her Conservative Party. On Thursday, multiple ministers from May’s Cabinet resigned in protest of the deal.

Following the resignations, backbencher MPs who strongly disapproved of the deal began to hand in letters of no confidence in the Prime Minister.

In the event that 48 letters are reached, it will begin a vote of no confidence. Many analysts believe it is likely that the 48 letters will be reached by next week.

The Pound recovered just slightly when UK Prime Minister Theresa May attempted to calm critics and markets on Friday morning. According to Connor Campbell, analyst at Spreadex:

‘The Pound is a bit like Theresa May at the moment. Seriously bruised by the fallout of the Brexit draft deal, shaken by a series of high profile resignations, but, for the time being (and however misguidedly), emboldened by a sense of resilience.

All this is to say that Sterling avoided another round of losses as Friday got underway. Of course, it is still very early in the day, with some key figures yet to fully reveal their allegiances.’

Sterling found further support when it was revealed that Environment and Food Minister Michael Gove had ruled out resigning from the Cabinet over the Brexit.

However, the Pound’s recovery was ultimately limited compared to Thursday’s major losses, as investors still fear a leadership challenge is on the way and could further undermine PM May or her Brexit plan.

USD Demand Limited Despite Political Jitters

The US Dollar has been resilient and steady in recent weeks, with the US economic outlook strong and the Federal Reserve expected to keep hiking US interest rates.

This made it easier for the US Dollar to climb against a highly weak and volatile Pound on Thursday.

Demand for the US Dollar was further boosted on Thursday by the results of October’s US retail sales results, which beat expectations. The monthly figure was forecast to climb to 0.5% but instead jumped to 0.8%. The yearly figure improved from 4.2% to 4.6%.

According to analysts at Wells Fargo:

‘This morning’s release confirms our expectations of a strong holiday season. But, as the calendar flips to 2019, we expect a further moderation in spending, as the boost from tax cuts will start to fade for consumers and amid rising prices and tighter monetary policy.’

However, while safe haven currencies like the US Dollar typically benefit from global political jitters, speculation that US-China trade negotiations could start up again dampened appetite for safe havens.

GBP/USD Forecast: UK Politics in Focus amid Quieter Week for Data

A lack of major UK or US data due for publication in the coming weeks leaves the Pound to US Dollar exchange rate especially volatile to political developments.

Despite the Pound’s slight recovery on Friday morning, the currency is primed to plummet again at the first sign that the situation could worsen for UK Prime Minister Theresa May.

If a Conservative leadership challenge is activated, or if there are further signs that PM May’s bill will be defeated in a Parliament vote, the Pound could tumble further as ‘no-deal Brexit’ fears worsen.

Analysts have warned that in the event of a ‘no-deal Brexit’, the Pound’s fall may be even sharper.

A UK-EU Brexit summit is currently planned to be held on the 25th of November to confirm the deal. If that summit is delayed or cancelled this would also weaken Sterling.

On the other hand, if Prime Minister May is able to avoid a leadership challenge or gather more support for her Brexit bill, the Pound to US Dollar exchange rate could recover.

The US Dollar, on the other hand, will be driven by risk-sentiment and upcoming US data.

Data that could influence the Pound to US Dollar exchange rate next week includes US building permits, durable goods orders and existing home sales.
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