GBP/USD exchange rate undermined by UK political uncertainty in May
The pound dollar exchange rate began the month on a firm footing after the UK currency was bolstered by the Bank of England’s (BoE) policy decision on 30th April. Although rates were left on hold, the central bank indicated that persistent inflationary pressures could prompt interest rate hikes later this year.
The pair fell to around 1.351 on 4 May after renewed tensions in the Middle East supported the dollar.
The tide turned on 6 May with Middle East optimism causing the safe-haven dollar to tumble after President Donald Trump praised ‘great progress’ towards a ‘final agreement’ with Iran. This fuelled a surge in market risk appetite that helped the pound jump above 1.36.
The pound retreated into the 1.35 mid-range the following day as UK voters headed to the polls in closely monitored local elections.
A resilient pound recovered into the 1.36 range on 8 May, despite significant Labour losses in the elections. The UK currency found support after Prime Minister Keir Starmer vowed to remain in office.
The pound tumbled to around 1.331 – a five-week low – between 11 and 15 May amid political uncertainty that culminated in the prospect of Andy Burnham challenging Starmer for the role of PM.
The pound made a partial recovery on 18 May, climbing above 1.34 against the dollar. The move higher came as investors grew less anxious about the UK’s uncertain political backdrop and the IMF raised its UK growth forecast for this year.
The pound dollar rate consolidated in the 1.34 mid-range on 20 May, shrugging off a weaker-than-expected UK consumer price index. Investors overlooked cooling headline inflation, with the print having little effect on BoE interest rate hike expectations.
The pair retreated on 26 and 27 May amid UK retail figures that remained firmly in negative territory and intensified US-Iran tensions that increased demand for the safe-haven dollar.
The pound initially dipped below 1.34 against the dollar on 28 May after a new report highlighted the UK’s worsening youth unemployment problem, before weak US data helped it rebound. Figures showed the US economy grew more slowly than previously forecast in the first quarter.
It was a similar trend the following day when the pound dollar rate softened to near 1.34, before rebounding as the dollar lost ground amid hopes that the US and Iran could negotiate some form of deal.
The pound dollar exchange rate ended the month around 1.345.
GBPUSD: 3-Month Chart
Looking Ahead
Influential data from the UK economy in June: Consumer Price Index (17 June), Claimant Count Change (18 June), Employment Change (18 June), ILO Unemployment Rate (18 June), Retail Sales (19 June), S&P Global Composite PMI (23 June), GDP (30 June).
Influential data from the US economy in June: ISM Manufacturing PMI (1 June), ADP Employment Change (3 June), ISM Services PMI (3 June), Average Hourly Earnings (5 June), Nonfarm Payrolls (5 June), Consumer Price Index (10 June), Producer Price Index ex Food & Energy (11 June), Michigan Consumer Sentiment Index (12 June), Retail Sales (17 June), S&P Global Manufacturing PMI (23 June), S&P Global Services PMI (23 June), Core Personal Consumption Expenditures (26 June).