GBP declines as market frets over Theresa May’s power as Prime Minister

The pound weakened in reaction to Theresa May’s recent Cabinet reshuffle yesterday, with the Prime Minister’s attempt to demonstrate her authority triggering a mixed response.

The pound starts this morning firmly in negative territory across the board ahead of today's data releases. The GBP/EUR exchange rate has fallen -0.2% to €1.1319, while the GBP/USD exchange rate is also down -0.2% at US$1.3510. GBP/AUD has fallen -0.3% to AU$1.7263, GBP/NZD has tumbled -0.6% to NZ$1.8825, and GBP/CAD is down -0.2% to C$1.6835.

Read on to find out why market focus may return to economic data today, giving the government some much-needed breathing room…

What’s been happening?

The pound was stuck around opening levels versus the euro and dropped versus the US dollar yesterday, thanks to the developing backlash against Theresa May’s Cabinet reshuffle.

What was supposed to be a strong display of authority is widely regarded now as an embarrassment, after Theresa May failed to move any of the key players in the Cabinet - largely because she lacks the political clout to fend off their leadership challenges, or because ministers themselves flatly refused to move positions.

This event has done nothing to boost market confidence in Theresa May’s leadership, prompting a minor GBP sell-off.

Sterling was able to largely hold its ground against the euro, however, as markets were keeping both eyes firmly fixed on tomorrow’s release of European Central Bank (ECB) monetary policy meeting minutes.

This meant that a chunk of positive German and Eurozone data, including strong industrial production and trade balance figures from the Eurozone’s powerhouse economy and a fall in the overall unemployment rate in the currency bloc to a nine-year low of 8.7%, was largely ignored.

Meanwhile, markets were buying into the US dollar due to its weakness against the pound - GBP/USD is still trending around its highest levels in 15 weeks, creating opportunities for those looking to buy the weakened dollar in the hope of profit.

What's coming up?

The UK data docket may be sufficient to distract markets from politics today, given that it contains industrial production, manufacturing production, construction output, and trade balance data, as well as the NIESR GDP estimate for the three months to December.

There is no Eurozone data on the calendar today, which could leave the euro with little support against in anticipation of tomorrow’s ECB minutes release.

Speeches from Federal Reserve policymakers Charles Evans and James Bullard could create some volatility for the US dollar, especially given that they will both be discussing the economic outlook for the US, with Evans also discussing the monetary policy outlook.

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Reaz Rahman
Senior Dealer

Reaz, our Senior Currency Dealer, joined us in January 2015. Reaz draws on his detailed knowledge of the foreign exchange markets to help customers to choose the right service and time to transfer.