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British pound sinks as UK political turmoil intensifies

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The British pound sank against the US dollar overnight, following weekend newspaper reports the UK Government is in deep disarray.

After gaining ground against the dollar last week on news the corporate element of the tax reform plan will be delayed by one year, investors have opted to sell the pound, Monday.

At 1000 BST, cable hit a day’s low-so-far of $1.3066, down from $1.313 earlier in the UK morning. The British pound was trading at $1.321 around the close of business, Friday.

Lack of support

British Prime Minister Theresa May has faced a tough time since she took the reins of the Conservative party leadership.

Her placement as Prime Minister, replacing David Cameron who stepped down following the country’s collective vote for Brexit, came after a party leadership battle fraught with half-truths and broken allegiances.

This latest bout of worry follows weekend news reports, including one written in the Sunday Times, highlighting May faces a three-front-battle:

  • Pressure on cabinet members after unacceptable behaviour and comments and following the resignation of two in the space of seven days.
  • A lack of support from a growing faction of the Conservative party who disagree with May’s policies, particularly on Brexit.
  • The prospect of a further delay on Brexit negotiations as the European Union negotiating team demand more of the UK than they’re currently willing to concede.

Investors lose confidence

When a government becomes unstable, something that is happening in the UK at a rapid pace, investors begin to lose confidence in the country and its ability to provide suitable investment returns.

Although the UK economy is growing and the Bank of England (BOE) is credible and is carefully monitoring all relevant situations, an extended period of political instability has the power to hit the economy, including business and consumer confidence, inward investment and consumer spending.

If business, consumers and foreign investors slow their spending in the UK, then the economy will suffer. That could also limit the BOE’s ability to raise interest rates further in the coming few years. And lower interest rates, particularly when other counties are raising rates, means a lower rate of investment return.

The longer the UK’s political infighting and inability to make Brexit progress continues, the more likely investors will continue to sell the British pound and weaken the currency further.

As of 10:30 GMT, Monday, 13 November, GBP/USD share price is 1.3117.

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