Pound Reaches Two-Year Lows Due To Political Uncertainty

On Monday, the British pound fell to a low of two years with traders shifting to the sideline, as a leadership contest began in the country to determine who would be the next prime minister of Britain.

Uncertainty about economy

The US dollar climbed against its major currency rivals this week, as the risk appetite amongst investors worsened just ahead of the US inflation data due for release on Wednesday. As far as the British economy is concerned, the uncertainty in the country has deepened after the resignation of Prime Minister Boris Johnson.


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The economy had already been under a great deal of pressure due to the rise in inflation, which is close to reaching double digits, the Brexit situation as well as the risk of economic recession. Whoever replaces Johnson as the country’s premier would have to make some big decisions when it comes to spending and taxes in Britain in order to mitigate the risks of a recession. However, it is possible that it could also turn up the heat on the inflationary pressures.

Sterling suffers

The British currency reached its lowest value against the US dollar since March 2020 at $1.1867 and it had fallen by 1.2% for the day. As compared to the euro, sterling recorded a marginal weakening, as the currency was trading at 84.80 pence.

The debate over Britain’s leadership comes in a week that already has a full plate in terms of economic data for the country’s economy, as the Gross Domestic Product (GDP) numbers are due for release. According to expectations of economists, there is not likely to be any gain in the GDP data for May and this has reinforced expectations of a contraction in the economy in the second quarter.

Expectations

Market analysts said that investors of the British pound may hope that a government that will not be distracted by scandal and one that would be dedicated to providing some coherence around the economy post-Brexit. But, they said that nothing could be said about it as yet since there is no guarantee as to who will pick up the mantle now.

The currency analysts said that until a new Prime Minister is selected for Britain, it is likely that the country’s currency will not see any direction. The latest positioning data for the week showed that short pound bets have recorded a slight increase to $4.2 billion. But, it should be noted that they were still nowhere close to the $6.3 billion that had been recorded in 2019 in November.

As far as other currencies are concerned, the euro is also dealing with a great deal of pressure, since the eurozone economy is also suffering from worries about gas supplies from Europe. This has seen the single currency take a big beating and come close to parity against the US dollar. The greenback, on the other hand, has received support from the interest rate hikes of the US Fed and demand for safe-haven assets.


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