TODAY, after just 44 days as UK Prime Minister, Liz Truss announced her resignation. The finance experts at Invezz have taken a look at the effect this sustained politically instability is having on the pound and the UK economy.
Dan Ashmore, financial analyst at Invezz, commented:
“As I write this in the immediate aftermath of Liz Truss’ resignation this Thursday afternoon, the pound has rallied 0.5% against the dollar.
Truss took over only 44 days ago, with the pound trading at $1.14. On 23rd September, after the controversial mini-budget, sent the pound into freefall – down towards $1.03. Some analysts were even calling for dollar/pound parity.
Such was the outcry over the mini-budget, that Truss was forced to walk back the changes, ultimately kicking the pound back up to $1.12. The chart below paints a grim picture of the Pound over the course of Truss’s short reign as PM.
Today, her resignation has led to a relatively muted market reaction, showing that the bulk of the harm and subsequent walkback had already been priced in – not only that, but her resignation was not altogether unexpected.
With her unfunded tax cuts well and truly off the table, the pound is unlikely to see the kind of extreme volatility that was experienced in late September following the bombshell budget announcement.
However, the vulnerability of the UK has been demonstrated – it is not a powerful enough economy to go toe to toe with the dollar. Down 18% against USD this year, expect the pound to continue to struggle.
In times of uncertainty, investors flock to the safest assets – and there is nothing safer than the dollar. Not only that, but the volatility and weakness of the pound has been laid bare for all to see. Investor confidence has been shot, and with renewed uncertainty about the next government leader, it is difficult to see the pound staging a rally.
Finally, interest rates continue to lag the Federal Reserve in the US, meaning capital will continue to flow into the States in pursuit of higher yields.
With the UK more reliant on energy imports too – amid a full blown energy crisis given the Russian war in Ukraine – the winter could be a tough one for the pound, if not the UK economy at large.
Liz Truss may be gone, but the damage to the pound is not.”
