GBP USD Exchange Rate Stumbles Lower on Political Uncertainty

Uncertainty surrounding Prime Minister Boris Johnson’s leadership caused the pound to slide lower against the dollar on Tuesday.

Despite his victory in Monday’s confidence vote, questions remain about the Prime Minister’s position after 148 of his own MPs voted against him.

The narrow 211 to 148 split among Tory MPs in support of the Prime Minister revealed the scale of opposition was greater than in 2018 when Theresa May faced a confidence vote.

The political headwinds unnerved investors, causing the UK currency to fall as much as 0.7% to 1.24, having initially clung on to gains after the result of the vote was announced on Monday evening.

The result also raised concerns over the potential action Mr Johnson may take to boost his support both within and his own party and with the public and how that might impact the economy.

Ongoing fears over the strength of the UK economy and downbeat data added weight to the pound’s burden on Tuesday.

UK retail sales fell 1.5% last month as the cost-of-living squeeze restricted demand, according to figures released by the British Retail Consortium (BRC).

Growth in the UK services industry slowed sharply last month to its weakest level since early last year amid soaring costs and recession fears, according to S&P Global.

Dollar gains as Treasury yields rise and risk appetite fades

The dollar was given a boost by rising US Treasury yields on Tuesday. Waning risk appetite also gave the US currency a leg up, increasing the safe-havens appeal ahead of a closely watched gauge of inflation on Friday.

Looking ahead

Halifax house prices and the S&P Global construction PMI for May are both slated for release from the UK economy on Wednesday.

All roads for the dollar lead to consumer price index data on Friday. This key indicator of inflation from the Bureau of Labour Statistics will influence Federal Reserve rate-setters appetite for aggressive hikes in the future.

Ahead of the Federal Reserve’s interest rate vote next week, which is widely expected to result in a 50 basis points rate hike, investors will focus on Friday’s consumer prices print for signs of how long the central bank may continue its path of policy tightening.

US inflation – which currently stands at a 40-year high – is expected to continue demonstrating signs that it may have peaked, having moderated for the first time in eight months in April.

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