More woes for Sterling as Liz Truss named new PM

Liz Truss has won the Conservative party leadership and takes over from Boris Johnson as the UK’s new Prime Minister.

Yet her victory is helping to further sink the troubled pound, and it looks as though things will only get worse.

As I was quoted by The Mirror, Pound Sterling Live, London Loves Business and Capital.com, amongst other media, up to now, Sterling is one of 2022’s worst performing major currencies, and on Monday fell to its lowest since 1985.

Part of the reason for the currency’s decline is because Russia has closed the Nord Stream 1 gas pipeline to Europe indefinitely, as the G7 agrees to impose a price limit on Russian oil exports.

Nevertheless, there’s no doubt that the pound will take a negative stance in regard to the UK’s new PM. Even if there’s a rally now the leadership race is over – albeit briefly – any honeymoon will be extremely fleeting.

There’ll be a massive increase in borrowing, thanks to Truss’s unfunded, promised tax cuts and huge spending plans. They are set to leave a £170 billion hole in the UK’s finances, and would drive up inflation by fuelling money growth, leading to more aggressive rate hikes by the Bank of England as it grapples to curb soaring inflation, which remains at a four-decade high.

The negative sentiment for the currency is also being sparked by Liz Truss’s populist agenda, including Britain’s attitude to its relationship with the EU and single market access, as well as issues with the Northern Ireland Protocol.

As I mentioned previously, the new Prime Minister’s indication that she would order a review of the Bank of England’s mandate was also impacting Sterling.

As political interference mounts, we forecast the pound – and the gilt market – to have a negative reaction. Markets will indeed be spooked by the politicisation of the UK’s central bank.

Therefore, investors with heavy exposure to UK financial assets shouldn’t wait to review their portfolios. Truss is helping to sink the pound further, and we believe it’s going to get a whole lot worse for Sterling before any improvement is seen.

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