The Pound US Dollar exchange rate made solid gains last week amid solid UK data and rising market jitters about US President Donald Trump’s controversies, as well as concerns that his plans on tax and infrastructure may never see the light of day. GBP USD surged from 1.2886 to 1.3030 last week.
GBP USD weakened on Monday morning however, as investors reacted to rising uncertainty about the upcoming UK general election.
Previously predicted to win in a landslide, the Conservative’s lead in opinion polls has slipped slightly and the opposition Labour party has gained.
Various polls have shown that the Conservative’s polling lead against Labour had essentially halved in a week, with some pollsters like YouGov giving the Tories only a 9-point lead over Labour.
While a big gap in popularity remains between the parties, a two-digit lead dropping to a one-digit lead within a week is significant and has caused uncertainty in UK markets.
The reasons for the drop in Conservative popularity over the last week has been reaction to their election manifesto from certain demographics.
UK Prime Minister Theresa May’s controversial social care plans include proposals to have the elderly pay for healthcare in their home unless they have under £100k in assets.
As the elderly are a key demographic for the Tories, this plan has been hugely unpopular and opposition party Labour has taken advantage of this, calling it a ‘dementia tax’ targeting those who become ill in their old age.
May is now under pressure to change or drop some of her social care plans in order to maintain a safe polling lead.
So why is a Conservative polling lead favoured by markets? It’s largely due to uncertainty and Brexit. UK markets have had enough uncertainty for one year and being unsure on which party will see Brexit negotiations through to the end will make investors even more anxious.
What’s more, the Brexit process has already been formally begun by May’s Conservative government. A sudden switching of hands in Brexit negotiations would certainly worsen market concerns about the future of UK-EU relations.
This means that if the Conservative poll lead continues to fall, GBP USD could be in for more losses in the coming weeks. The election is only a few weeks away now, taking place on the 8th of June.
The opposite is true too of course. If polling improves in the Conservatives’ favour in the final weeks before the election, Sterling could strengthen again.
The US Dollar has also suffered from political uncertainty in recent weeks, with US President Donald Trump embroiled in fresh controversies about Russia and his firing of ex-FBI Director James Comey.
If these controversies dent Federal Reserve interest rate hikes or if the Fed doesn’t hike US interest rates in June, the long-term ‘Greenback’ outlook will worsen. On the other hand, if Trump criticism cools and US data continues to impress, the US Dollar will be given more room to breathe.
At the time of writing this article, the Pound US Dollar exchange rate trended in the region of 1.3000. The US Dollar to Pound exchange rate traded at around 0.7710.
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