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British pound slumps in political uncertainty, reversing Liz Truss' resignation leap

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British Prime Minister Liz Truss announced her resignation on 20 October 2022 in front of 10 Downing Street in London, England.

Henry Nicholls | Reuters

LONDON – The British pound fell 1.4% against the dollar on Friday, more than wiping out moderate gains from Prime Minister Liz Truss’ resignation.

The pound was trading at $1.1074 at 1:20 p.m. London time, its lowest level since October 12.

Truss announced he would resign on Thursday, saying he would not be able to fulfill the post he was elected 44 days ago. His successor will be chosen within a week by politicians and members of the ruling Conservative party.

The pound was volatile throughout the day, but closed slightly higher than in the previous session.

“The sterling has become sensitive to the broad strength in the ‘king dollar’ today and reaffirms our view of what we saw yesterday – and even the prospects of a Rishi Sunak leadership – ‘not changing the game’ for GBP markets,” Viraj Patel said. The senior strategist at Vanda Research told CNBC.

“Overseas investors are likely to see this political volatility as another reason to exit UK assets.”

Sunak, who was finance minister under former Prime Minister Boris Johnson and raced head-to-head with Truss for leadership over the summer, is considered the favorite to replace him.

During the campaign, he warned that Truss’ plans for massive tax cuts would lead to “higher inflation, higher mortgage rates, and eroded savings” and lead to sales in the bond markets – that’s exactly what happened and sparked calls for his resignation.

One month turbulence

Sterling slumped after a controversial ‘mini-budget’ involving billions of dollars in unfunded taxes on Sept. cuts. The pound hit an all-time low against the dollar on September 25.

However, the currency rose slightly as the Bank of England began emergency bond buying on September 28 and announced the reversal of nearly all tax cut plans on October 17.

The sterling “still very weak and will likely remain weak”, Embark Group’s chief investment officer Peter Toogood told CNBC’s “Squawk Box Europe” on Friday.

“We have a fiscal deficit, we have a current account deficit, and we constantly have the courtesy of foreigners, and in practice we have been like that for decades,” he said.

Toogood added that he believes the UK is already in a real recession, as figures released on Friday show a sharp slowdown in September spending, a nominal recession soon after – meaning a contraction in GDP. UK GDP grew by 0.2% in the second quarter, but the inflation rate rose above 10%, squeezing consumer spending power and putting pressure on businesses.

There is currently uncertainty over the direction the UK’s new leader will pursue the country’s fiscal policy, whether the new Finance Minister Jeremy Hunt will update the budget with an independent economic forecast on 31 October, as planned, or even remain in office. In that case.

But Patel of Vanda Research said in a note: “It looks odd that a new Prime Minister will delay tax increases and spending cuts.

“They wouldn’t last long if they took that route… markets would quickly ‘vote them’. My initial feeling was ‘nothing would change’ on the policy front – and if there was something Sunak would double down on trying to bring down inflation as he had promised throughout the campaign.”

In this complex environment, the Bank of England is meeting on November 3 to decide whether and by how much to raise interest rates after a 50 basis point hike in September.