In recent weeks, the GBP/USD exchange rate has experienced a notable decline, marking a significant departure from the relative strength the British Pound exhibited against the US Dollar just a month and a half ago. This downward trend has raised questions about the primary drivers behind this shift. While it is essential to acknowledge the broader context, it is plausible to attribute a portion of the recent drop to factors related to the stability of the United Kingdom rather than any inherent strength in the US economy.

One concerning development this week was the announcement by the Birmingham City Council that it is effectively declaring virtual bankruptcy due to its inability to sustain funding for local services. The council revealed debts exceeding £760 million, painting a grim financial picture. This distressing situation raises concerns about the ability of other councils, with Stoke-on-Trent being particularly singled out as the next potential candidate facing fiscal challenges.

The backdrop of these financial difficulties in the UK is further compounded by political instability. The prospect of an upcoming by-election, triggered by Chris Pincher’s unsuccessful appeal to overturn his suspension, as well as the resignation of Ben Wallace from his position as the Defence Secretary, has added to the challenges facing UK politics.

Conversely, the US Dollar has displayed strength across various currency pairs, with many major currencies experiencing depreciation against it. The consistent release of robust unemployment claims data from the United States has only added to the USD’s strength. Looking ahead, the outlook appears unfavourable for competitors of the US Dollar.

The upcoming release of key economic indicators in the US, including CPI and Retail Sales data, will likely be closely watched events. Given recent trends, these releases could spell trouble for the Pound and the Euro. However, the looming Federal Reserve interest rate decision in the following week is an even more critical event on the horizon. Forecasts regarding the Fed’s stance are currently divided, and the outcome of this decision could have a significant impact on the GBP/USD and EUR/USD exchange rates. Depending on the Fed’s policy direction, we may witness a resurgence of US Dollar dominance reminiscent of the early part of the year.