Following a significant decline on Thursday, the British Pound extended its weakness against the US Dollar during Asian trading hours on Friday (May 15th). As of 14:09, it hit a low of 1.3339, marking its lowest level since April 8th, with a drop of approximately 0.46%. For the week so far, GBP/USD has accumulated a loss of around 2%.
As domestic political turmoil in the UK continues to intensify, the Pound is finally beginning to react negatively. The previously observed "strange divergence" between deteriorating UK political fundamentals and the Pound's price resilience is being rapidly corrected. Concurrently, the US Dollar is breaking out, creating a dual pressure scenario.
Political turmoil is ultimately taking its toll, with Prime Minister Starmer's position appearing increasingly precarious. UK political instability continues to escalate. Former Health Secretary Wes Streeting resigned on Thursday, an act that seems to have emboldened other potential challengers. Among the most threatening is the influential left-wing Mayor of Greater Manchester, Andy Burnham, widely seen as the greatest threat to Prime Minister Starmer's leadership. Following the resignation of a Labour MP from Greater Manchester, a path has been cleared for Burnham's potential return to Parliament. If successful, he could mount a challenge for the premiership. Markets are concerned that, against a backdrop of worsening UK fiscal prospects and persistent pressure on long-term government bonds, Burnham might push for increased spending and higher taxes.
Politics is overshadowing economics, with positive data being ignored. The peculiar aspect of the Pound's reversal is that political turmoil is causing markets to overlook the UK's relatively strong economic performance.
The Citi Economic Surprise Index indicates that the extent to which UK data has exceeded expectations has reached its highest level since the second half of 2023. Thursday's stronger-than-expected GDP data further solidified this trend—the economy grew by 0.6% quarter-on-quarter in Q1, significantly surpassing forecasts, with positive contributions from services, manufacturing, and construction. While seasonal distortions and stockpiling related to the Iran conflict may have exaggerated the figures, the report confirms that economic activity is much stronger than many had feared. This suggests that pressure on the Pound stems more from concerns over political stability and fiscal credibility rather than a sudden deterioration in economic fundamentals.
Compounding the Pound's woes is the ongoing strength of the US economy. For most of the past year, US data has consistently exceeded expectations overall. Overnight data for March retail sales were broadly positive—overall retail sales, retail sales ex-autos, and the closely watched control group all rose by 0.5% month-on-month. The control group once again beat expectations, indicating resilient household demand despite rising fuel costs and high borrowing rates. Meanwhile, import prices surged 1.9% month-on-month, the largest increase in four years; excluding food and energy, they rose 0.7%, aligning with signals from earlier CPI and PPI data this week that inflationary pressures may be spreading within the US economy. Export prices also continued to exceed expectations, improving US terms of trade at a time when many economies are being squeezed by high imported energy costs. Combined with strong activity data, this reinforces the view that the Federal Reserve may need to maintain higher interest rates for longer, even as geopolitical tensions intensify.
The US Dollar Index breaks out, with technicals turning positive. Based on the recent trajectory of the US Dollar Index (DXY), since hitting a near-term low of 97.62 in early May, the index has climbed for several consecutive trading days. It has gained over 1.5% so far this week and broke above the key 99.00 level on Friday, reaching its highest point since May. From a daily chart perspective, this rally exhibits classic rebound characteristics with "higher lows and higher highs." The candlestick bodies have gradually expanded, and pullback candles show significantly reduced volume, indicating active buying support and waning bearish momentum. The DXY extended gains on Friday, reaching a high of 99.13 as of 13:15, its highest level since April 13th.
Bearish alignment, with price below all moving averages. According to the GBP/USD daily chart, the current technical setup shows a clear bearish dominance. The price has effectively broken below all four key moving averages, with the system forming a typical bearish alignment. Specifically, the 20-day MA is at 1.3526, the 50-day MA at 1.3429, the 100-day MA at 1.3478, and the 200-day MA at 1.3423. The current price is trading around 1.3353, significantly below all these averages. Furthermore, the 50-day MA has crossed below the 100-day MA, providing further confirmation of the downtrend's continuation.
Overall, UK political turmoil and fiscal concerns are outweighing better-than-expected economic data. Meanwhile, the persistence of US economic exceptionalism and the technical breakout in the US Dollar Index are providing dual momentum for further downside in the currency pair. As of 14:10 Beijing time on May 15th, GBP/USD was trading at 1.3354/55.
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