Pound to Dollar Hits Fresh 7-month Low, U.S. Funding Dramas Cited

File image of Donald Trump. Official White House Photo by Shealah Craighead.

The Dollar is in charge amidst investor fears over political wrangling in the U.S. over the government's budget.

Stocks fell, and the Dollar rose after rebel Republicans effectively torpedoed a spending agreement between Republicans and Democrats that President-elect Donald Trump had sanctioned.

Market anxieties rose after 38 Republicans unexpectedly voted against the spending bill Despite Trump’s support. The defiance from within Trump's own party caught many by surprise and pointed to potential chaos and uncertainties once he takes office in 2025.

"If Congress does not reach an agreement, the U.S. government will run out of money tomorrow. Many agencies that do not perform essential functions would then have to close. This would put some strain on the US economy as a whole, but is not likely to jeopardise the expansion," says Bernd Weidensteiner, an analyst at Commerzbank.

The Dollar is a classic safe-haven asset, tending to rise during such events. "The risk-off mood has seen the U.S. dollar index remain around the 108.5 level, near its highest since November 2022," says George Vessey, FX Strategist at Convera.

"Sentiment across financial markets has turned sour at the end of the week, as a bill to extend U.S. government spending to March 14 fell far short of the two-thirds majority needed to pass. US Congress needs to find a deal today to keep the government open. Equities futures are in the red, and the safe haven and high-yielding U.S. dollar is modestly stronger against peers," he adds.

The result of these developments is a decline in the Pound to Dollar (GBP/USD) exchange rate to its lowest level since May, at 1.2472.

Charts suggest an extension of the September-November selloff is now resuming, with the next target likely being 1.23, the April 2024 low.

"GBP/USD has fallen to its lowest in six months, back below its 100-week moving average and the $1.25 support level. More downside is possible given the relative strength index is yet to move into oversold territory on the weekly and daily timeframes," says Vessey.

GBP/USD investment bank consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/USD. Please request a copy here.

Adding to market anxieties was Trump's overnight demand that the EU purchase more crude oil and gas in order to reduce the current size of the U.S. trade deficit with Europe.

He warned that "it’s tariffs all the way!!!" if there was a failure to comply.

Tariffs represent a major unknown for 2025, with the Euro tipped to come under pressure in the event that Trump raises import tariffs on the EU's exports to the U.S.

"The EU and the euro-zone will remain in the firing line of Trump due to the simple fact that the US deficit with the euro-zone is the second largest in the world after China," says Derek Halpenny, an analyst at MUFG Bank.