Heightened political uncertainty to make Sterling even weaker
The Pound will likely decline further and more radically next week if Liz Truss is named the UK’s next Prime Minister as expected.
Sterling has registered its largest monthly fall against the Dollar since October 2016, at the height of the Brexit fallout.
Last month, the Pound fell 4.5% to $1.16 and nearly 3% against the Euro. Sterling kicked off September with an additional 0.3% fall against the greenback.
We forecast things will get worse for the Pound when Britain’s new PM is unveiled next week, as I was quoted by London Loves Business, amongst other media. If Truss wins, as anticipated, it can be assumed that the Pound will decline further. As it is, it’s already one of the worst performing major currencies. Indeed, to my mind the Pound will be given a prolonged beating amid the mounting political and economic uncertainty.
We forecast Truss’s planned £30 billion in tax cuts would drive up inflation by increasing money growth, leading to more aggressive rate hikes in an attempt to curb soaring inflation which is currently at a 40-year high.
Furthermore, Truss’s populist agenda would spark a negative reaction by the already weak Sterling.
Boris Johnson’s likely successor has also indicated a review of the Bank of England’s mandate is on the cards.
As such, a looming War of Independence over the Bank of England is expected. This possible struggle and the politicisation of the UK’s central bank will likely generate substantial uncertainty, which will spook financial markets.
Of course, economists broadly recognise that central bank independence is one of the reasons why inflation declined over the decades. So, we can expect the Pound and the gilt market to have an adverse reaction to any form of heightened political interference.
As such, those investors with major exposure to UK financial assets should review their portfolios. Diversification across asset class, sectors, regions and currencies is, as always, the best way to sidestep risk and make the most of opportunity, as mounting political and economic turbulence will continue to batter the Pound over the coming months.