British Pound extends the decline below 1.3200 on UK political instability concerns

GBP/USD declines to near 1.3195 in Wednesday’s early European session.
Keir Starmer announced his resignation as Prime Minister on Monday, raising political risk and weighing on the British Pound.
Markets adjusted expectations for a more hawkish stance from the Fed.

Lallalit Srijandorn FXStreet

The GBP/USD pair loses traction to around 1.3195 during the early European trading hours on Wednesday. The British Pound (GBP) softens against the US Dollar (USD) amid political instability following Keir Starmer’s resignation as Prime Minister. Traders brace for the US May Personal Consumption Expenditures (PCE) Price Index data, which is due later on Thursday.

The UK was plunged into yet another political crisis as Keir Starmer resigned on Monday under intense pressure following Andy Burnham's victory in the Makerfield by-election last week. His Labour Party will now need to select a new leader to lead the country.

“Markets will be focused on Burnham’s views on fiscal policy and whether there will be any relaxation of the current fiscal rules,” said Commonwealth Bank of Australia strategists, including Kristina Clifton. “A loosening in fiscal rules would likely be poorly received by the UK bond market,” and weigh on the pound, they said.

Furthermore, a weaker-than-expected UK Purchasing Managers’ Index (PMI) reading contributed to the Cable’s downside. UK private sector activity contracted for a second straight month in June. The flash Composite PMI fell to 49.4 from 49.7 in May. This figure registered a 14-month low and below the 50 line, which indicated activity among goods producers is generally declining. Meanwhile, the Manufacturing PMI eased to a three-month low of 53.1 in June from 53.9 in the previous reading.

Traders reassess the timing of possible US rate hikes after hawkish signals from the US Federal Reserve (Fed). Traders are now pricing in nearly an 86.1% chance of a Fed hike in December, up from 61% before last week’s FOMC meeting, according to the CME FedWatch tool.

"The dollar's strength right now, at the end of the day, it's still hawkishness, if you look at Fed expectations with Fed funds futures right now, they are some of the highest odds that we've seen in a while," said Eugene Epstein, head of trading and structured products at Moneycorp in Stamford, Connecticut.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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