Does the New Prime Minister Mean a Revived British Pound?

Michalis Efthymiou, Market Analyst at NAGA

UK appoints a new prime minister, Rishi Sunak, but is he coming to the rescue? The UK, its national currency, and the British equities have had a very turbulent few months. Read more here.

Brexit-British-Pound

Officials have confirmed that the new UK Prime Minister is Rishi Sunak but is he coming to the rescue? The UK, its national currency, and the British equities have had their most turbulent month since the Covid-19 outbreak. The turbulence is due to a streak of poor fiscal policy decisions taken by the ex Prime Minister and Chancellor.

Rishi Sunak was the individual who had warned that the fiscal policy stimulus proposed by Truss would result in higher interest rates and more inflation. Economists believe that the new Prime Minister has shown the ability to improve stability and investor confidence. The new PM has vowed to “fix the profound economic crisis”. The question is what we may see over the following weeks.

The reality is that Lizz Truss’ exit is not the answer to all problems, even though this is what the media is focusing on. The huge fiscal and economic problems remain for the new Prime Minister. Sunak will focus on fiscal stability and damage control rather than economic growth like the previous PM.

The New Prime Minister and the UK Economy

Without doubt, the UK economy is struggling and is the underperforming economy of the G10 group. However, the new PM and Chancellor will not be able to focus on growth when debt is so expensive for both the government and citizens. The UK government will be looking to lower the current cost of debt (borrowing via bonds). In order to do so, they will need to significantly improve investor trust and also their large budget deficit. The yield on 10-year bonds rose 0.25%, while the rate of return on 20-year bonds rose by 1.09%.

Nevertheless, the value of the GBP will need more than stability in the GILTS market to regain lost ground against the USD and the Euro. Two of the past three month’s GDP figures have been in the minus and the UK economy has actually shrunk by -0.7% over the last 3 months. If the next 3 month’s figures are also in the minus, it will most definitely result in a recession. Investors would ideally like to see the UK’s GDP remain above 0% as a minimum and for inflation to decline.

The Bank of England under the New Prime Minister

Another issue is the Bank of England’s base rate. Interest rates on mortgages are close to reaching 7% which is the highest seen in over 14 years. This is not only in response to the expected rate hikes in November. Higher rates were also triggered by uncertainty in response to the mini-budget. The BoE is now in a difficult position as inflation is high but so are mortgage rates. This has resulted in additional pressure on UK consumers and all parties want to avoid a sharp and sudden collapse. In October, the number of completed UK mortgages in the UK declined to 2,258.

Even though these figures do not support the GBP in the longer term, we can see that the Pound has reacted positively to the appointment of Mr Sunak. The price of the GBP against the US Dollar has increased by 2% and by 1% against the Euro. Investors are happy to see that the Bank of England and UK Government is again on friendly terms.

The GBP is currently obtaining indications from technical analysis that it is likely to rise going forward. However, investors are still extremely skeptical against the US Dollar and even the Euro.

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