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Will Political Uncertainty Drag the British Pound Lower?

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Political uncertainty drags British pound lower

The British pound (FXB) has been sailing along since the UK election this month. The current UK Prime Minister is fighting to hold on to the government and needs to prove her party’s majority in the House of Commons this week. The Democratic Unionist Party (or DUP) is expected to extend its support for May but with some conditions, and this uncertainty is likely to weigh on the British currency. If the current government is unable to prove its majority, there could be a collapse of the current government and could lead to another round of elections in the UK. The British pound closed against the US Dollar (UUP) (USDU) at 1.27, depreciating 0.45% last week.

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Traders remain net short on pound

As per the latest Commitment of Traders (or COT) report released on June 23, currency traders continued to be bearish on the British pound. As of Tuesday, June 20, the total net speculative contracts stood at -37,600, a decrease of 1,800 bearish contracts as compared to the previous week. Comments from the Bank of England’s governor who didn’t seem to be supporting the idea of a rate hike in the near term added to the pound’s (GBB) bearish tone.

Volatile week ahead

Economic data is limited from the British economy, and focus would be on political uncertainty and Brexit. A recent poll by YouGov indicated that the opposition party’s Corbyn is leading. Corbyn could call for another round of elections if the prime minister fails to garner support from the DUP. Discussions surrounding Brexit indicate that there could be a possibility for a soft Brexit with border access between the UK (EWU) and the EU (VGK). A Brexit with softer terms will likely be beneficial for the UK and the EU economies.

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