British pound slides on political uncertainty, reversing Liz Truss resignation bounce

British Prime Minister Liz Truss announces her resignation outside Number 10 Downing Street, London, Britain on October 20, 2022.

Henry Nicholls | Reuters

LONDON – The British pound fell 1.4% against the dollar on Friday, more than erasing modest gains it had made following the resignation of Prime Minister Liz Truss.

Sterling was trading at $1.1074 as of 1:20 p.m. London time, its lowest level since October 12.

Truss announced she would step down on Thursday, saying she could not fill the mandate she was elected to just 44 days earlier. Her successor is to be elected by politicians and members of the ruling Conservative Party within a week.

The pound was rocky throughout the day but finished slightly higher than the previous session.

“The pound was vulnerable to the broad strength of the ‘king dollar’ today and reiterates our view that what we saw yesterday – and even the prospects for Rishi Sunak’s lead – is not ‘game changing’ for GBP markets” , Viraj Patel, senior strategist at Vanda Research, told CNBC.

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“Overseas investors are likely to see this political volatility as another reason to exit UK assets.”

Sunak, who was finance secretary under former Prime Minister Boris Johnson and went head-to-head with Truss for the leadership over the summer, is believed to be the favorite to succeed her.

During the campaign, he warned that Truss’ plans for massive tax cuts would lead to “higher inflation, higher mortgage rates and eroded savings” and cause a sell-off in bond markets — which is exactly what happened, prompting calls for her to resign.

A month of turbulence

While the pound was already in the red against the dollar, which has rallied massively this year on Fed rate hike expectations and stock market volatility versus other currencies, it plummeted after the controversial September 23 “mini-budget” that cost billions of dollars covered taxes included cuts. Sterling hit an all-time low against the greenback on September 25th.

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However, the currency saw some upward movement as the Bank of England began bailout bond purchases on September 28th and announced the withdrawal of almost all tax cut plans on October 17th.

Peter Toogood, Embark Group’s chief investment officer, told CNBC’s Squawk Box Europe on Friday that the pound sterling “is still very weak and likely to remain weak”.

“We have a budget deficit, we have a current account deficit, and we are constantly at the behest of strangers’ kindness, and have been in practice for many decades,” he said.

Toogood added that he believes the UK is already in a real recession as figures released on Friday showed a sharp slowdown in spending for September, with a nominal recession – meaning a fall in GDP – to follow shortly. UK GDP grew 0.2% in the second quarter, but inflation has risen to over 10%, putting pressure on consumer spending and businesses.

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There is now uncertainty about the direction in which the new British leader will take the country’s fiscal policy, whether new Treasury Secretary Jeremy Hunt will deliver a budget update with an independent economic forecast on October 31 as planned – and even whether he is still in office will be then.

However, Vanda Research’s Patel said in a note: “Reports that a new prime minister would delay tax increases and spending cuts seem odd.

“They wouldn’t last long if they chose to go that route…the markets would quickly ‘vote them out’. My initial feeling is that “nothing is changing” on the political front – and if anything, Sunak would try once again to bring down inflation, as he has promised throughout the campaign.”

Against this complex backdrop, the Bank of England meets on November 3rd to decide whether and by how much to raise interest rates after raising interest rates by 50 basis points in September.

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