According to Walid Koudmani, Chief Market Analyst at XTB (one of the world’s largest listed FX and CFD brokers), today’s collapse of the pound had already started last Friday, following the announcement of new expansive fiscal measures and the largest cuts ever recorded by a British government announced by the newly appointed PM Truss.
The direction taken by 10 Downing Street is one aimed at a strong stimulus to economic growth. However, the financing of these policies and the impact they will have on inflation, which is even higher than in Europe, are of great concern to Saxons and also to the rest of global finance.
The pound-dollar exchange rate (GBP/USD)
The exchange rate of the pound against the US dollar, the main reserve currency in the world, suffered a flash crash today up to 4.5% falling below the lowest level even since the history of the surveys, which is 1.0350.
The British currency loses on all other major currencies in the world, appearing today to be the real tail-end of this special club of reserve currencies, although there was a rebound against the Japanese Yuan toward which it recovered all the ground lost since Friday.
Among the reserve currencies, the British Pound today is the one that has been at its worst as mentioned above, what is striking is not its subservience to the US Dollar towards which for weeks if not months now all major foreign currencies have been losing ground but the fact that it has lost ground towards all other currencies (except for a relief rally towards some Asian currencies).
The performance of the pound is worrisome and may prove to be a harbinger of what lies ahead for the currency. Investors and in particular traders are valuing firmer currencies in part because of the uncertainty that the Bank of England and the government have conveyed in the wake of the recent 50 basis point rate hike that has been labeled by most as inadequate to stem the inflation problem given even expansionary policies.
The new crown generates uncertainty in the UK
In the aftermath of the many changes that have forcefully affected the reign of King Charles III, starting with Boris Johnson’s replacement at the helm of government by Liz Truss and just over two weeks ago of the late Queen Elizabeth II by her son King Charles III, have created the perfect climate of uncertainty that reduces investment on British soil because of a still unclear vision that the British royal family and government will adopt.
The first test case was precisely the meeting that sanctioned the 50 basis point rate hike, which appeared to investors as a missed opportunity to give a strong signal to fight the cost of living. In words, the British government says it is ready to do together with the Bank of England whatever is necessary and as much as their power to fight inflation and boost consumption.
While expansionary policies and fighting inflation do not exactly go hand in hand, the first thing done by the Truss Conservative government is precisely a set of regulations aimed at getting consumption back on track despite double-digit inflation.
This has inevitably contributed to hurting the British pound, which experienced its worst period between Friday and today, even reaching record lows.