Matter of time before pound takes new blows

The UK bond market and the pound are gaining some air as Finance Minister Kwasi Kwarteng revises his tax plans. With a mounting debt burden and a sputtering economy, it is only a matter of time before the pound takes another blow.

When you think of the United Kingdom, you quickly think of double-decker buses, red telephone boxes and the royal family. However, based on recent years, you can also think about making unfortunate political choices. One of the best examples is the state of affairs surrounding the Brexit referendum. On 23 June 2016, a small majority of the population voted to leave the EU. The surprising outcome resulted in a huge political struggle in its own parliament and subsequently with the European Union. In the end, the United Kingdom turned its back on at the end of January 2020. However, the question is whether the Brexit voters from 2016 are still so happy about this.

Rising prices and painful recession
Since then, it has become a lot more difficult for people and goods to cross the border. This leads to a huge shortage of truck drivers and seasonal workers, among other things. As a result, it was often impossible to supply gas stations or restaurants, for example. Last summer tens of millions of pounds worth of vegetables in fields rotted away because insufficient harvest aid could be found. Due to shortages in all kinds of areas, prices for consumers were pushed up considerably. The depreciation of the pound also contributed to the rise in UK inflation to its highest level in XNUMX years. According to the Bank of England, the country is now in recession.

Planning and decisiveness
To tackle the problems, the new Prime Minister Liz Truss and her Finance Minister Kwasi Kwarteng need a good plan and the decisiveness to implement the measures quickly. Within a week it has become clear that the duo falls short in both areas. The package of tax measures that Kwarteng presented a week and a half ago would have helped the rich in particular. In addition, financial markets were shocked by the prospect of a further rise in the high British government debt. Interest rates on bond markets rose, making the associated mortgage interest rate unaffordable for many Britons.

Relief is temporary
This week, Kwarteng and Truss proved that they lack decisiveness in addition to good plans. Tax plans have been weakened considerably under pressure from the IMF. This led to great relief in financial markets. Government bond yields have fallen somewhat and the pound has risen more than 5% since last Monday's low. Chances are, that relief is only temporary. Because even in modified form, the tax plans ensure that the British government debt will rise considerably. Moreover, the approach of Kwarteng and Truss does not inspire much confidence. It seems only a matter of time before the pound takes another hit due to another misstep or setback. For the time being, the British currency is still in the corner where the blows fall.

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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