Expect the British pound to fall even further and more radically this week should frontrunner Liz Truss be named Prime Minister, warned the CEO of leading independent financial advisory and fintech deVere.
Nigel Green’s warning comes as the UK currency has registered its most dramatic monthly decline against the dollar since October 2016 – the height of the Brexit referendum fallout.
Sterling fell 4.5% in August to $1.16 and almost 3% against the euro. It has started September with a further 0.3% drop against the U.S. dollar.
“This is alarming – and we expect it to get worse for the pound when the UK’s new Prime Minister is announced this week,” said Green.
“Should 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.”
The beleaguered pound is set to be given a continued beating amid heightening political and economic uncertainty, noted the deVere CEO.
“We expect that Truss’s planned £30 bln 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,” he said.
“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.”
Bank of England mandate
The likely successor to Boris Johnson has also suggested reviewing the Bank of England’s mandate.
“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 in an earlier comment.
It is widely acknowledged amongst economists that central bank independence is one of the reasons why inflation fell over the decades.
“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.”
Investors with major exposure to UK financial assets should review their portfolios, he suggests.
“As ever, portfolio diversification across asset class, sectors, regions and currencies is an investor’s best tool to mitigate risk and seize opportunity.”
The deVere CEO concluded that, “intensifying political and economic turbulence is going to continue to deliver a bloody nose to the embattled pound over the next few months.”
