The Pound to Dollar (GBP/USD) exchange rate weakened sharply on Tuesday as mounting political uncertainty in the UK combined with rising US inflation and renewed Middle East tensions to support the safe-haven US Dollar.
At the time of writing, GBP/USD was trading around $1.3541, down roughly 0.5% on the day.
Pound to Dollar (GBP/USD): 1.35241 (-0.57%)
Euro to Dollar (EUR/USD): 1.17363 (-0.35%)
Dollar to Japanese Yen (USD/JPY): 157.7045 (+0.29%)
DAILY RECAP:
The Pound (GBP) came under heavy selling pressure on Tuesday as political tensions in Westminster intensified following Labour’s poor local election performance.
Current councillor changes show Labour down 202 seats, the Conservatives down 61, while Reform UK added 270 councillors. The Liberal Democrats gained 29 seats and the Greens added 23.
Sterling sentiment deteriorated amid reports that growing numbers of Labour MPs were questioning Prime Minister Keir Starmer’s leadership and discussing the possibility of replacing him.
Although Starmer publicly insisted he would remain Prime Minister, investors remained uneasy as speculation spread that divisions within the cabinet were deepening.
The political uncertainty triggered another sharp rise in UK gilt yields, with long-dated borrowing costs climbing to their highest levels since the late 1990s.
Markets were increasingly concerned that a leadership change could result in looser fiscal policy and higher government borrowing, further weighing on Sterling.
Meanwhile, the US Dollar (USD) strengthened as renewed concerns over the fragile US-Iran ceasefire boosted demand for safe-haven assets.
Comments from US President Donald Trump warning that the ceasefire was on “massive life support” unsettled markets and supported the ‘Greenback’.
Additional support came from the latest US inflation figures, which showed consumer price inflation accelerating to 3.8% in April, the highest level in almost three years.
The stronger inflation reading reinforced expectations that the Federal Reserve may need to keep monetary policy tighter for longer.
GBP/USD Forecast: Politics and Inflation Risks to Drive Movement
Looking ahead, GBP/USD is likely to remain highly sensitive to developments in Westminster and the Middle East.
Any further escalation in speculation surrounding Prime Minister Keir Starmer’s leadership could keep Sterling under pressure, particularly if UK bond yields continue to rise.
For the US Dollar, geopolitical tensions and inflation data are expected to remain supportive.
The latest US producer price index could provide additional momentum for the ‘Greenback’ if factory input costs accelerated again in April.
Renewed instability in the Strait of Hormuz may also reinforce safe-haven demand for the US Dollar.
