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Pound US Dollar Exchange Rate to Sink Further on UK Political Volatility?

Pound US Dollar Currency Forecast

GBP/USD Exchange Rate Slumps on UK Political Chaos

The Pound US Dollar (GBP/USD) exchange rate plunged in the wake of Liz Truss’ resignation, highlighting the political turmoil gripping the UK once more.

At time of writing the GBP/USD exchange rate is around $1.1122, a 0.88% plummet from this morning’s opening levels.

Pound (GBP) Slid on Political Volatility Compounded by Economic Uncertainty

The Pound (GBP) initially rallied on the news of Liz Truss announcing her resignation yesterday. Confidence in her government and the UK economy plummeted as her mini-budget caused market meltdowns and the Pound plummeted to its lowest ever level. But her resignation buoyed the markets on hopes of a return to fiscal responsibility.

However, a flurry of economic and political headwinds dragged Sterling down as uncertainty returns to the fray. Public sector borrowing came in much higher than expected at £79.3bn for September, versus £73.6bn. Escalating borrowing costs brings the debt as a share of GDP at 98%, the highest since the early 1960s. Investors fear as the financial cost to bring the debt down could come in the form of £40bn worth of spending cuts or tax raises.

Retail sales also came in much worse than expected. With market forecasts of a 0.5% fall, sales in the retail sector fell by 1.4%, marking the second consecutive month of declining sales. More concerning is that volume of sales continues to fall, now sitting at 1.3% lower than pre-Covid levels.

Looking forward, and the weight of political uncertainty is likely to sap further demand for the Pound. With Truss now the shortest-living prime minister in history, confidence surrounding the Conservative party remains rock bottom. News is starting to circulate of Boris Johnson looking to return to power only several months after resigning over numerous scandals. Ongoing political uncertainty could deter GBP investors.

US Dollar (USD) Buoyant on Risk-Off Market Mood

Meanwhile, the US Dollar (USD) is enjoying renewed demand in the wake of a souring global market sentiment. A 14-year high in US Treasury bond yields also provides a moderate tailwind to the ‘Greenback’.

A relentless hawkish stance from the Federal Reserve remains a key prop for the US Dollar. Rate hike expectations were reinforced through several key policymaker speeches yesterday. Due to inflation remaining far above the Fed’s target rate, continued interest rate hikes are in the pipeline. Federal Reserve Bank of Philadelphia President Patrick Harker has said that the Fed is not done with raising rates, and added:

‘The Fed is actively trying to slow the economy, we are going to keep raising rates for a while.’

Looking ahead, the US Dollar could see further movement next week with the release of both manufacturing and services PMI data. An expected improvement from a contraction to marginally above expansion could see the ‘Greenback’ strengthen.

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