What a New Prime Minister Spells for the Pound’s Future

On Tuesday, 25 October, Rishi Sunak was sworn in as the new Prime Minister of the UK. The 42-year-old is the third UK PM in 7 weeks, replacing Liz Truss, who was PM for the whole of 44 days. Sunak comes at a time of great financial instability for the UK, with Truss’ mini-budget causing major capitulation in the bond markets even as the UK enters what the Bank of England is calling a recession. 

Pound Sterling, which entered a freefall as Truss’ tax cuts hit the market, is on its way to recovery, surging to a month-high at the current price of 1.1614 – in part due to USD weakness – as Sunak pledged during his first speech as PM to fix the “mistakes” his predecessor made. Sunak, who comes from a finance background, was previously Chancellor of the Exchequer, heading the UK’s finance ministry. 

However, speeches and background hardly constitute proper guidance, and Sunak has the unenviable task of steering the UK in a time of decades-high inflation (September CPI is at 10.1% year-on-year) and stunted growth. 

Post-Market

For now, it seems like the markets are happy enough with the stability that Sunak can bring, with the conservative politician regarded as being more fiscally disciplined than Truss. 

Beyond that, however, pound traders will have to largely rely on sentiment as Sunak has been quiet on the details about how he will tackle Britain’s fiscal problems. Even after reversing most of the tax cuts made by Liz Truss, Sunak and his finance minister Jeremy Hunt will have to find between £30 – 40 billion to bring down public debt, according to an estimate made by the Institute for Fiscal Studies.

Hunt has also pushed the finance ministry’s 31 October fiscal statement to 17 November – leaving the Bank of England to make its 3 November interest rate decision without any information about how much public money the Treasury plans to spend. Forecasts for the BoE’s next rate hike lie at 0.75%.

Meanwhile, analysts at BNP Paribas expect interest rates to cap out at 4.5% in early 2023, lower than an earlier forecast of 5%. The current interest rate set by the BoE is 2.25%. 

Sunak’s main challenge will be balancing austerity with the “fair and compassionate way” he plans to restore economic stability. In a time of fervent inflation, government cuts affect the most vulnerable of the population. Not cutting means Sunak will have to find money – which will be a challenge in a slowing economy. 

Investors are now advised to look out for the quarter-on-quarter US GDP figures for Q3, which is currently forecast to grow 2.4% against last month’s drop of 0.6%. Positive figures might exert more pressure on the pound and cap any upsides related to renewed optimism about Sterling. 

As a  friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.