Quiet spring, wild autumn for the British pound

British Prime Minister Rishi Sunak has led the United Kingdom to calmer financial waters. The country appears to be escaping a threatened credit rating downgrade and, moreover, the pound has entered calmer waters. However, that favorable picture threatens to change after the summer.

In a week in which a whole bunch of central banks made decisions about the policy interest rate, one message received little attention in the financial world. Credit rating agency Fitch raised the rating outlook for the United Kingdom from negative to stable on Friday. That is a small boost, because the creditworthiness suffered a major dent a year and a half ago. At the time, then Prime Minister Liz Truss threatened to significantly increase the budget deficit. Truss lasted less time as Prime Minister than the head of iceberg lettuce, which, according to the British sewage newspaper Daily Star, had a longer life than her reign. And to spare readers an internet search: after exactly seven weeks she was succeeded by Rishi Sunak.

Order in order
Under Sunak, public finances have come under much better control. According to Fitch, the UK budget deficit will reach 4,2% of GDP this year. That is a lot less than the 7,2% gap the country was heading for during Truss's short reign. The national debt amounts to 103,6% of gross domestic product. Although this is more than twice as much as the debt ratio of the Netherlands, the percentage is clearly below the 109% that Fitch had estimated in the autumn of 2022. Moreover, the country still has considerable financial room for maneuver, as a large part of the national debt is fixed for the long term at a low interest rate.

Too quiet?
There was little sign of the adjustment by Fitch on currency markets. Shortly before that, the pound rebounded briefly until the Bank of England hinted that an interest rate cut may be coming in June. Recently, the British central bank's policy has been largely in line with the European Central Bank and the Federal Reserve, which appear to be keeping the policy interest rate at the same level for the time being. The explanation of the interest rate decision resulted in a loss of just over 1% for the pound. This meant that the currency remained within a narrow bandwidth of 3% against the euro, within which the pound has been moving for ten months. The pound is therefore in remarkably calm waters, because in the past price movements were often much larger.

Christmas shopping in London
During the corona pandemic, the pound fell by 12% within a month. And after the Brexit referendum in 2016, the loss amounted to more than 10% within just a few days. These kinds of shocks always come unexpectedly. But there are plenty of reasons to expect the pound to fluctuate more strongly against the euro in the course of 2024. If the Bank of England actually cuts interest rates earlier than other central banks in June, this could set the currency in motion. And the run-up to the Lower House elections also promises to be a turbulent time. The British are expected to go to the polls around October. Anyone traveling to the United Kingdom in the spring or summer does not have to fear major currency surprises. But Christmas shopping in London can easily turn out to be a lot more expensive or probably cheaper.

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.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.