The British Pound (GBP) recovered some lost ground against the US Dollar (USD), trading near 1.3175 during Asian hours on Thursday. This rebound comes despite ongoing UK political instability following the resignation of Prime Minister Keir Starmer on Monday, which was prompted by Andy Burnham's victory in the Makerfield by-election last week. The Labour Party now faces the task of selecting a new leader, and traders are closely watching for potential policy shifts under Burnham, whose expansionary fiscal stance, higher taxation, and increased gilt issuance could exert downward pressure on the Pound [1].
Market participants are also focused on the upcoming US May Personal Consumption Expenditures (PCE) inflation data, which is expected to show a headline rise of 4.1% year-over-year, up from 3.8% in April. The core PCE inflation is projected at 3.4% year-over-year, compared to 3.3% previously. Any signs of easing US inflation could weaken the Greenback and provide support for GBP/USD [1].
Expectations for US interest rate hikes have increased following hawkish signals from the Federal Reserve. According to the CME FedWatch tool, markets have priced in a 34.2% probability of a 25 basis points rate hike at the July meeting, up from 8.5% a week ago, and a 66.4% probability for September, up from 29.1% [1]. These shifting expectations are influencing currency market dynamics and could impact the GBP/USD pair further.
Analysts warn that the combination of UK political uncertainty and potential fiscal policy changes, alongside evolving US monetary policy, may limit the upside for the British Pound in the near term [1].
CONCLUSION
The British Pound remains resilient above 1.3150 despite UK political upheaval and anticipation of key US inflation data. However, ongoing uncertainty regarding UK leadership and fiscal policy, coupled with rising expectations for US rate hikes, could cap further gains for GBP/USD in the short term.