The British pound plummeted to a fresh two-year low on Tuesday as political uncertainty weighs on market sentiment
Nasdaq reported that the British pound sterling slipped to the lowest rate in the last two years. The main reasons for the epic fall are a broad dollar rebound and political uncertainty following Boris Johnson’s resignation as prime minister last week.
The leadership change puts additional pressure on the British economy, already under strain from an almost double-digit inflation rate, the risk of a recession, and Brexit.
Britain’s main opposition Labour Party will put forward a motion for a no-confidence vote in Johnson’s government today, with the vote expected to take place on Wednesday. Until the new government leader takes over, the national currency may stay volatile.
The necessity of tax cuts is becoming the focal point of the leadership race. Nearly all of the candidates promise to cut business or personal taxes. Former Chancellor Rushi Sunak, the early front-runner, is the only candidate who has soft-pedalled the prospect of imminent tax cuts.
Besides the political tensions, the weakening economy also plays its part in the FX rates. Economists expect May GDP data to show no growth. That reinforces expectations of an economic contraction in the second quarter.
Although the latest weekly positioning data showed a slight increase in short pound bets to $4.2 billion, they remained well below a November 2019 high of $6.3 billion.