The Pound to US Dollar exchange rate plunged to a two-month low last week, depreciating around three cents on news that Britain was left with a hung parliament after the snap election called by Theresa May.
US Dollar Benefits From Big Week
Sterling initially strengthened by around one cent versus the US Dollar last week as traders fretted over the potential that an inquiry into Donald Trump’s treatment of former FBI chief James Comey could destabilise the US President. However, the ‘Greenback’ emerged untroubled from Comey’s testimony, suggesting that markets do not foresee an impeachment anytime soon. Having said that, it is worth noting that President Trump has shown little sign that he is capable of passing his proposed tax cut and infrastructure spending policies through Congress – this could heap pressure on the US Dollar later down the line.
The other major event last week was the UK general election, which saw the Conservative party lose its majority. The instability and uncertainty of a minority government took ‘Cable’ lower by around three cents and the outlook does not look good for Sterling.
Diverging Central Banks
This week is widely predicted to see the Federal Reserve raise interest rates 25 basis points. This move should provide the US Dollar with a little bit of support, but for a significant uplift the ‘Greenback’ will need the US central bank to release a hawkish message pointing to additional policy tightening in the second half of the year.
The Bank of England (BoE) is also due to announce policy, with most investors betting on no changes. However, we could see policymakers strike a dovish tone and any hints that the uncertainty of a hung parliament could prompt further monetary easing would likely drag Sterling even lower.
Also on the agenda is UK inflation and unemployment data, which is anticipated to show no change and therefore is likely to have little impact on the GBP/USD exchange rate.
‘Soft Brexit’ Saviour?
Although Sterling appears to be on a negative course in the short term as uncertainty reigns supreme, there is one potential scenario that could see the Pound mount a recovery.
The election was seen as an attempt by Theresa May to gain a mandate for her vision of Brexit (border control, no single market access and walk away with no deal if needs be). However, the fact that the Tories lost seats and their majority suggests that the electorate did not endorse this view. This leaves the possibility that Britain may now pursue a Brexit deal maintaining access to the single market, which could help Sterling rally in the long run.
The Pound softened on Monday when Brexit minister David Davis played down talk of a softer approach to EU trade negotiations, and the immediate outlook for GBP/USD appears to be negative. However, we could see Sterling rebound in the future if single market access returns to the UK’s negotiation strategy.