Weighed down by declining hopes of a breakthrough in Brexit talks between the British government and the opposition and a broad-based rally in the dollar, the pound held at a two-month low on Wednesday, after briefly bouncing off news that an attempt to launch an earlier vote of no confidence on Theresa May had been thwarted. The sterling rose to its lowest level since Feb 19; it closed at $1.2949, increasing by 0.1 per cent. The pound rose by 0.3 per cent against the Euro to close at 86.46 pence. It must be noted that the British pound is yet to recover from the dramatic fall that was experienced after the UK voted to leave the EU and.
Sterling made a brief surge recently after it was made clear an attempt to topple Prime Minister Theresa May had failed as the 1922 executive committee of backbench Conservative Party MPs voted by nine votes to seven to change party rules which protect the Prime Minister from a no-confidence vote until December. However, the committee asked the PM to give more clarity about her imminent departure from the office. According to analysts, investors took a sigh of relief that the impending political upheaval was pushed back.
Gains, however, remained short-lived as currency investors remain anxious to hold the currency amid increasing concerns that the ongoing delay and political impasse are damaging the economy. May on Tuesday informed her top team of ministers that though discussions with the opposition Labour Party to find a way forward on Brexit had some sticky points but were serious. She also called on the opposition leader to expedite the talks in order to find a solution before the European Parliamentary elections. According to analysts, the recent decline in Sterling suggests market participants are becoming increasingly weary of the Brexit process and associated political wrangling in the parliament.
The pound, aside from domestic factors, has faced pressures from strengthening of US Dollar as well. The dollar index, which measures the value of the US dollar relative to a basket of six major rival currencies, hit a 22-month high overnight to reach around 98.30. The greenback capitalised on weakness in other major currencies and was supported by strong U.S. housing data, signalling that the American economy is outperforming rivals. However, investors will watch the release on Friday of U.S. gross domestic product data for the first three months of 2019 and appetite for the Dollar is likely to take a hit if the GDP data fails to meet expectations.
Some analysts are quite constructive about the outlook for the pound in the short term as the imminent risk of Britain leaving the bloc without a deal has been removed by an agreement with the EU to delay Brexit until at least October. The currency's relative undervaluation has also made it an attractive deal. According to last week's data, for the first time since June 2018, net derivative positions in the pound turned slightly in favour of holding long sterling positions. The currency is also strengthened by robust domestic data, with retail sales volumes beating analyst's expectations and rising by the most in nearly two-and-a-half years in annual terms.
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