The resignation of two senior ministers on Tuesday evening, including former Chancellor Rishi Sunak, was not the main factor behind the pound's fall, Rabobank currency strategist Jane Foley told BBC Radio 4 Today. "The market is much more focused on growth and what this government is going to do … the news alone doesn't add much to the suffering," she said.
On Tuesday, the pound fell below $1.19 for the first time since March 2020, when the UK's first Covid lockdown was enacted. It traded at $1,189 from a two-year low of $1,187 during late trading in London on Wednesday afternoon. It later climbed above $1.19. But the pound rose 0.5% against the weaker euro to 85.46p on concerns about the economic impact of higher energy prices.
A weak pound means that imported products such as groceries are becoming more expensive and this is pushing up gas prices at the gas station. It also means British holidaymakers get less money when they buy from abroad. However, British goods and services sold abroad may be more attractively priced to overseas customers.
Regained his position
The pound was flat against the dollar on Wednesday, as markets in London and Europe rose and some analysts said they were moving back to lower levels. The FTSE 100 in London, which fell nearly 3% on Tuesday, was able to gain 1.2% on Wednesday, closing at 7107.77. Russ Mold, chief investment officer at AJ Bell, said markets may recover somewhat in investors' hopes that a planned 2023 corporate tax hike can be reversed. Shares may also be "oversold" on Tuesday, he added.
The dollar is showing strong positions due to rising US interest rates and because investors view it as a safe bet. “At the moment a lot of people are concerned about a recession – a recession in the US, a recession in Europe and of course we have our cost of living here in the UK,” said Ms Foley. “Sterling is still weak on its own, despite the Bank of England already raising interest rates five times in this cycle, and the reason is that the market is very concerned about the growth prospects here in the UK,” she said.
“The sterling could fall further. One of the problems with investors”, she said: “is the labour shortage in the UK, which has not returned to pre-pandemic levels "because we've lost a lot of workers."Many people have left the labour market during the pandemic, and the combination of Covid and Brexit has prevented foreign workers who have left from returning.
Sterling's recent decline was also due to "the deterioration of the UK government's protocol for Northern Ireland," said George Godber, fund manager at Polar Capital. Investors feared that an escalation in the post-Brexit dispute over Northern Ireland's trade arrangements could lead to the government cancelling part of that deal, potentially sparking a trade war. “International investors don't like it and it puts a lot of pressure on the pound, which in turn feeds the economy,” he said. "Gas prices are high because the pound has been weak." Changes in gas prices at gas stations are mainly related to the price of crude oil and the behaviour of the pound against the dollar, as crude oil is traded in dollars.
Chancellor Nadhim Zahavi, who was appointed to the post on Tuesday, said there is nothing to worry about when it comes to tax cuts. He referred to corporate income tax and said he would review any steps he could take to "beat inflation, but also get back to that vibrant economy that fuels growth".
Sir John Cunliffe, deputy governor of the Bank of England, told the Today program the Bank will "do everything" to ensure that rising living costs do not become a long-term problem.
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