Pound Dives Against Dollar As UK PM Theresa May Clings Onto Power

The pound climbed higher versus the US dollar during the course of last week. However, sterling’s strength was tested as the new week kicks off and the pound tumbled, pulling the pound US dollar exchange rate 0.5% lower to US$1.3120 for the pound.

What do these figures mean?

When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.

For example, it could be written: 1 GBP = 1.28934 USD

Here, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound.

Or, if you were looking at it the other way around: 1 USD = 0.77786 GBP

In this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.

Sterling was showing signs of resilience in the previous week as it managed to climb higher. The pound gained ground despite the continuing stalemate in Brexit talks and despite Prime Minister Theresa May losing two of her cabinet ministers.

Just as Theresa May was trying to steady the ship, UK newspaper The Sunday Times reported that 40 members of the Prime Minister’s Conservative party are ready to sign a letter of no-confidence. Should this report be correct, it means that just 8 more would need to sign the letter in order for a vote of no-confidence to be triggered. This could potentially lead to leadership battle within the Conservative party at a crucial point during the Brexit negotiations. The potential political instability has unnerved pound traders.

How does political stability boost a currency?
Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.

While politics looks set to be a key factor in the week ahead for the pound, economic indicators could also play a central role in driving sterling’s direction. Tomorrow sees the release of inflation data, the first high impacting indicator in a busy week of data releases.

Headlines on Tax Reform Progress Remain Central for dollar

The mood towards the dollar soured in the second half of last week. With little on the US economic calendar for investors to focus on, their attention was squarely on US tax reform setbacks, which pulled the buck lower.

The House of Representatives and the House of Senate both proposed vastly different versions of the tax reform last week. The Senate Republicans underwhelmed the investors with their version, crucially proposing that corporate tax cuts are delayed until 2019, instead of the initial news that they would begin around the turn of this year.

The dollar slumped heavily at the end of last week on these concerns. Traders had been assuming that Trump’s pro-growth inflation boosting policies would be implemented quickly, forcing the Federal Reserve to quicken their interest rates setting cycle. If there are signs of these policies delaying further, the dollar can fall.

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