The pound as a plaything of political chaos

For the third time in just over six years, a summer battle is raging for the British premiership. Rishi Sunak and Liz Truss will decide who will succeed Boris Johnson in early September. What are their economic plans and what are the consequences for the exchange rate of the pound?

The political chaos in the United Kingdom has been so great in recent years that even Italy would be ashamed of it. The misery started with the unexpected outcome of the Brexit referendum in June 2016. Prime Minister David Cameron resigned when a narrow majority of Britons chose to leave the EU. The baton was taken over by Theresa May. That went quite smoothly, by the way. After two rounds of voting, May and Andrea Leadsom were the only candidates remaining. But due to May's huge lead in the polls, Leadsom chose to pull out rather than campaign all summer. And so the United Kingdom already had a new prime minister within a month of the Brexit referendum.

Whole series of scandals
However, May was unable to properly steer the country out of the EU. The House of Commons repeatedly rejected May's departure agreements with the EU. Under great pressure, she resigned in early June 2019. After a hot election campaign, members of the Conservative Party named Boris Johnson as her successor. But after less than three years at the helm, BoJo also recently announced his departure. After a series of scandals, the pressure on Johnson was simply too high. In particular, the parties he attended while the whole country was paralyzed by corona lockdowns will be remembered for a long time to come. Meanwhile, the battle between Sunak and Truss has erupted for the preference of the approximately 200.000 members of the Conservative Party. The polls close at 2:17 PM local time on Friday, September 00nd.

Tax plans
The result, which will be announced on Monday 5 September, also has consequences for currency markets. There are quite large differences in the economic and Brexit plans of the two candidates. As Treasury Secretary in Johnson's cabinet, Sunak has raised taxes to the highest level since the 50s. He has already hinted that that will not change if he becomes prime minister. A lower tax would in fact fuel sky-high inflation even further. On the other hand, Truss wants nothing more than to cut tax rates as soon as possible. This would give many Britons who are struggling to make ends meet some more financial space.

What do the betting offices say?
However, lower tax revenues make it more difficult to get the budget in order. A rapid rise in government debt could undermine confidence in the pound. Also in terms of Brexit policy, a victory by Truss could be the stepping stone to a somewhat more turbulent period for the British currency. She was in fact an outspoken supporter of the confrontation that Johnson sought with the EU about the lack of control of freight transport between Northern Ireland and the British mainland. Sunak is in favor of better cooperation with Europe. That could bring the pound into calmer waters. However, according to British betting offices, Truss has the best chance of becoming the new prime minister in early September. Either way, the British pound is heading for a hot, exciting summer.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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