Pound US Dollar Exchange Rate News: GBP/USD Fluctuates as UK Hunts for Next PM

October 21, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Fluctuates as UK Hunts for Next PM

GBP/USD Exchange Rate Volatile as PM Leadership Race Begins

The Pound to US Dollar (GBP/USD) exchange rate traded in a wide range on Friday amid fresh concerns over UK politics.

At time of writing the GBP/USD exchange rate traded at around $1.1206, roughly the same as Friday’s opening levels, having slumped to $1.1057 before bouncing back.

Pound (GBP) Under Pressure as Political Uncertainty Undermines Trade

The Pound (GBP) struggled for support on Friday, weakening against many of its peers, as the hunt for a new Prime Minister began after Liz Truss’s resignation on Thursday.

After only 44 days in office Truss resigned following growing pressure from her peers. By Thursday afternoon, 15 Tory MPs had publicly called for her to step down. Incentivised by the growing rebellion from her backbenchers and the scrapping of her mini-budget Truss relinquished her premiership.

While the Pound initially firmed amid Truss’s resignation, it quickly shed these losses as UK political uncertainty continues to drive volatility.

During Friday’s trading session the Pound was struggling for support. This was due to a mix of political uncertainty as the early front runners for PM were announced and poor data released.

Worrying UK retail figures and a bigger-than-expected increase in government borrowing unsettled investors on Friday. Domestic sales contracted by 1.4% in September following a 1.7% contraction in August, and government spending figures are the second highest September borrowing on record, reporting an increase from £9.34bn to £20bn.

However, after touching an eight-day low, GBP/USD managed to bounce back as volatility continues in UK markets.

US Dollar (USD) Mixed Despite Risk Aversion

The safe-haven US Dollar (USD) initially strengthened against the Pound on Friday.

The upside came amid a generally downbeat market mood. The risk aversion was in some part attributed to hawkish comments made by several Federal Reserve policymakers on Thursday.

Among the policymakers Patrick Harker seemed particularly keen to keep pushing for higher interest rates. On Thursday he said:

‘We are going to keep raising rates for a while… Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year.’

USD investors are currently pricing in a 75bps hike at the Fed’s next policy meeting. If true this would bring US interest rates up to 4% in October, reaching Harker’s expectation.

Elsewhere, the escalating conflict between Ukraine and Russia could also be contributing to risk aversion. A fresh wave of attacks in Kharkiv and Zaporizhzhia have stoked new concerns about the impact the war could have on the geopolitical landscape across the globe.

However, a surprisingly upbeat mood in the afternoon saw the safer US Dollar lose its gains.

GBP/USD Exchange Rate Forecast: Early Week Data Releases to Drag on GBP?

Looking ahead, the Pound US Dollar exchange rate could be hurt by weak data early in the coming week.

On Monday, the October flash PMIs are due. Economists expect manufacturing and services activity to contract, which could create headwinds for Sterling.

Tuesday’s Confederation of British Industry (CBI) data could also put the Pound under pressure. Both industrial trends orders and business optimism are forecast to drop, which could stoke UK recession fears.

In the meantime, GBP will likely continue to remain sensitive to political developments as the PM leadership race continues.

Turning to the US, Monday’s PMIs are also expected to be downbeat, which could weigh on USD.

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