UK Political Headlines Continue to Infuse Volatility in GBP/USD Exchange Rate
Updated: The Pound Sterling to US Dollar (GBP/USD) exchange rate has bounced back from a three-year low this afternoon, even finding some gains in response to the latest UK political developments.
This comes after Tory MP Philip Lee stunned markets by dramatically defecting to the Lib Dems in the middle of the PM’s opening statements, resulting in the government losing its slim majority.
The moment defecting Tory MP Phillip Lee takes his seat with the Liberal Democrats, leaving Boris Johnson's government with no working majority
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GBP investors appear hopeful this will tip the scales in the favour of MPs seeking to prevent to a no-deal Brexit with a bill which would compel Johnson to request another Brexit extension from the EU.
At the same time, the US Dollar was sold off this afternoon after the ISM manufacturing PMI reported a shock contraction in the US factory sector last month.
GBP/USD Exchange Rate Extends Losses as Political Uncertainty Grows
The Pound Sterling to US Dollar (GBP/USD) exchange rate remains on the defensive this morning, as UK politics remain in focus.
At the time of writing the GBP/USD exchange rate is trading at around $1.1989, leaving the pairing slightly above the three-year low struck in early trade.
Pound (GBP) Vulnerable as Markets Brace for Parliamentary Showdown
The Pound (GBP) could close below $1.20 against the US Dollar (USD) for the first time since 1985 today as the GBP sell-off gathers pace amid heighted political uncertainty in the UK.
It looks to be a pivotal week for UK politics as parliament reconvenes today following the summer recess.
Rebel Tories and opposition parties are set to clash with the government today in an effort to seize control of the Commons timetable and push through legislation to compel Boris Johnson to request another Brexit delay from the EU.
Johnson has signalled that government defeat today would necessitate a snap election, an event which could result in even greater political uncertainty and stoke volatility in Sterling.
MPs are returning to Westminster for a #Brexit showdown that could end in a general election
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Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo said:
‘The Pound is being sold all over the place, because the political risk has forced us to recognize that a no-deal Brexit is possible. At this point, I see no reason to stay long in sterling.’
Piling even more pressure on the Pound this morning was also the release of the UK’s latest construction PMI, which printed below expectations last month.
US Dollar’s (USD) Bullish Run Continues
At the same time, the US Dollar (USD) maintained it upward trajectory today, extending its run of multi-month gains.
Despite expectations of another rate cut from the Federal Reserve this month, the ‘Greenback’ has remained in strong demand in recent weeks.
This momentum in the US Dollar is at least partly attributed to recent optimism in US-China trade relations, with Donald Trump confirming last week that high-level talks between the two countries will go ahead this month as planned.
GBP/USD Exchange Rate Forecast: Soft US Manufacturing to Cap US Dollar?
Coming up, the publication of the ISM manufacturing PMI may offer the Pound to US Dollar (GBP/USD) exchange rate some respite later this afternoon.
Economists forecast the data will show grow in the US factory sector continued to slow last month.
This may cap any upside in USD as another soft reading may put more pressure on the Federal Reserve to continue easing its monetary policy.
While Sterling sentiment is likely to remain dominated by domestic politics, also potentially influencing GBP exchange rates will be the publication of the UK’s latest services PMI.
Wednesday’s data is expected to show growth in the UK’s dominant service sector remained weak last month, possibly putting more pressure on the Pound as it increases the risks of the UK falling into a recession.