On Tuesday, the British pound fell to a new two-year low against the US dollar, as investor sentiment was under pressure due to political uncertainty. However, the currency got some respite after the dollar saw some broad-based weakness.

Political turmoil

The resignation of British Prime Minister Boris Johnson in the previous week added to the doubts hanging over the country’s economy. It is already under pressure because the inflation rate seems to be moving towards double digits, the impact of Brexit, and the possibility of a recession.

The main party in the opposition i.e. the Labour Party plans to put forward a no-confidence vote on Tuesday in Johnson’s government. According to a party source, the vote is expected to be conducted on Wednesday.

Analysts said that leadership questions are going to buffet British currency, as there is a question about whether there will be a prime minister focused on fiscal discipline, or a leader who would move on unfunded tax cuts. This would result in a more forceful response from the Bank of England in terms of monetary policy tightening. Thus, the sterling is likely to continue to be volatile until the leadership question is answered.

Sterling’s fall

The currency has already fallen by 2.5% this month. During late afternoon trading, sterling was holding steady at $1.18940, after having declined to reach a low of $1.18075. It was softer against the euro, as it was trading at about 85.55 pence, which brought it lower by 0.12% for the day. In earlier trading, the euro had declined to its weakest level since May against the pound.

The leadership race of the ruling Conservative party has become focused on the topic of tax cuts, as almost all candidates are promising to reduce personal or business taxes. On Tuesday, Rishi Sunak, the former finance minister, also launched his leadership campaign. He advertised himself as an ‘honest’ premier who would promote economic growth, reduce the state’s role and balance the books.

Weak economic data

Other than politics, the other problem that Britain is facing is that of weak economic data. On Wednesday, economists are expecting GDP data and believe it will be weak, showing no growth. This would only reinforce expectations of a decline in the economy in the second quarter.

The most recent positioning data for the week had shown that short pound bets had increased slightly to a value of $4.2 billion. Nonetheless, they were still quite low and did not even come close to the high reached back in November 2019, which had put them at $6.3 billion.

While the euro seems to be struggling the most, the British pound is also not doing well against the dollar. The greenback is getting a lot of support, primarily from the fact that the US Federal Reserve continues to be aggressive in terms of monetary policy tightening. It is expected to raise rates even further in this month’s meeting, which will again give the dollar support and push it up.