UK political melee downs pound

Yasmine Raso

Senior Journalist, Financial Newswire

5 September 2022

The UK’s pound sterling has suffered its worst monthly decline against the U.S. dollar since the peak of the Brexit referendum fallout in October 2016 after months of political uncertainty.

Nigel Green, DeVere Group chief executive, said it should be expected that the pound will continue to fall if Liz Truss is to be named UK Prime Minister, as is also expected soon.

“This is alarming – and we expect it to get worse for the pound when the UK’s new Prime Minister is announced next week,” he said.

“Should the front runner, Liz Truss, win, as is expected, it can be reasonably assumed sterling will plummet further. It is already one of this year’s worst performing major currencies.

“We expect that Truss’s planned £30bn in tax cuts would push up inflation by increasing money growth, prompting more aggressive interest rate increases from the Bank of England as it struggles to control inflation which is running hot at a four-decade high.

“In addition, Truss’s populist agenda – including the UK’s relationship with the EU and single market access and issues with the Northern Ireland Protocol – would trigger a negative reaction by the already weak pound.”

The pound sterling fell 4.5 per cent in August to USD$1.16 and declined close to three per cent against the euro. It commenced September with an additional 0.3 per cent fall against the U.S. dollar.

“We expect a coming War of Independence with the Bank of England. This potential tussle and the politicisation of the UK’s central bank is likely to create considerable uncertainty which will spook financial markets,” Green said.

“Taking back control sadly doesn’t always mean making the right decisions. We can expect the pound and the gilt market to react badly to any sense of growing political interference.”

Green also recommended investors that have large exposures to UK-focused assets should review and re-think their portfolios.

“As ever, portfolio diversification across asset class, sectors, regions and currencies is an investor’s best tool to mitigate risk and seize opportunity.

“Intensifying political and economic turbulence is going to continue to deliver a bloody nose to the embattled pound over the next few months.”