I think historians are going to have a field day in years and perhaps decades to come when they come to write on the events of this last week in British politics.
Did we really live through a week where a government with a 69-seat parliamentary majority completely lost its way? Including seeing a British PM who scored a comfortable win in an exhaustive 3-month leadership election sack her Chancellor after only 38 days! And for implementing the measures she campaigned on and wanted him to do!
Not since the humiliation of the International Monetary Fund bailout in 1976 have we seen an unravelling quite as spectacular in the UK.
But there is good news
The markets did not crash, so no new Black Friday in the financial markets in the way some had predicted.
Without wishing to be unkind to Liz Truss, it feels like she is in office but not in power.
Normally that would be very bad news for the Pound.
It’s well known that normally, financial markets hate political instability above all else.
I guess one thing is certain…
There is nothing normal about these times. The Pound fared quite well as we went through last week, touching a 5-week high on Thursday against the Euro before falling back a fraction on Friday. Against the mighty Dollar, the Pound gained nearly 6% in the first 4-days of last week but again fell off slightly as Friday\’s events unfolded.
For clients looking to buy Australian Dollars there was even better news. The Pound rose nearly 4% on the week to touch its highest level against the Aussie since March.
So where does the Pound go from here?
In the coming week, we will get some important economic data releases.
The latest UK and EU inflation data on Wed and UK retail sales figures on Fri. But attention will remain very much focused on the circus at Westminster.
By the time some of you read this, will Truss even still be in office?
Regardless of the state of UK politics, the good news for the Pounds outlook is that everything in the currency markets is relative.
With the EU mired in its own issues: euro-sceptic governments now in place in Hungary, Poland, the Czech Republic, Sweden and Italy; inflation at a Euro era high including a scarcely believable 17% in Holland; the success of the Ukrainian army in driving back the Russian forces adding to the fear that a cornered and beleaguered Putin will use tactical nuclear weapons; the Euro faces enough of its own problems for me to be able to suggest that after last week, not much else can go wrong in the UK political arena so the bad news is already priced in so we could reasonably expect, however perversely, better times ahead for clients looking to buy the Euro from the Pound.
Likewise, the Dollar could be hit by fresh US political turmoil with former President Trump being subpoenaed to appear in front of the Congressional committee investigating the events of the mid-term elections.
Last week, the latest US inflation data showed the consumer price index rising by 8.2% in the 12 months to September 2022. The higher than expected figure by analysts suggest the Biden White House is struggling to bring down the decades high rate of inflation before the November elections. This despite the Federal Reserve’s very aggressive interest rate increases throughout 2022.
Could the Fed increase US interest rates by further 0.75% rises in both November and December, when they next meet? If so, what does that do to Democrat chances on 8th November.
Of course, currency market volatility can bring trouble but with careful monitoring can also bring opportunity.
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This week\’s quote is from George Orwell
“Freedom is the right to tell people what they do not want to hear”.
