British Pound dives to five-week lows below 1.3350 as UK political crisis deepens

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The British Pound (GBP) extends losses against the US Dollar (USD) for the fourth consecutive day on Thursday, trading at 1.3337 at the time of writing, as the crisis in the UK cabinet deepens, fuelling concerns about a power vacuum that might trigger another fiscal crisis.

GBP/USD extends losses to 1.3330 area, and is more than 2% down this week.
The Pound dives across the board as UK Prime Minister Keir Starmer struggles for survival.
Solid US macroeconomic data and high inflationary pressures are buoying the US Dollar.

The resignation of the Health Secretary, Wes Streeting, on Thursday, has increased pressure on an increasingly isolated Prime Minister Keir Starmer. Calls to step down within its own Labour Party have been mounting this week, with several Labour lawmakers moving to replace him, after the disastrous results in last week’s local elections.

The fight for power within the Labour Party has heightened concerns about a disorderly replacement of Starmer and the emergence of a candidate seeking looser fiscal discipline, which might renew concerns of a fiscal crisis.

The US Dollar, on the other hand, remains bid, as a resilient economy, confirmed on Thursday by Retail Sales and weekly Initial Jobless Claims figures, combined with surging inflationary pressures, have boosted expectations that the Federal Reserve will be forced to hike interest rates by the end of the year or at the beginning of 2027.

The UK economic calendar is thin on Friday, and investors’ focus will remain on the summit between US President Donald Trump and his Chinese counterpart Xi Jinping. Comments regarding the talks have been positive so far, although the market is waiting for concrete details about trade agreements or specific measures to reopen the Strait of Hormuz.

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.