Sterling still suffering as markets await bigger Bank of England rates move
While the UK government remains unwilling to make notable concessions on its economic policies, the Bank of England will struggle to restore confidence in the embattled pound.
When Kwasi Kwarteng announced last week that the UK government’s plan to abolish the 45% income tax rate in the UK had been shelved, the new chancellor of the exchequer did not just provide yet another reminder that a week – or to be precise, 10 days – is a long time in politics. He also relieved some of the pressure on a currency that had touched record lows.
We expect that the Fed won’t be able to go much further with tightening
But with prime minister Liz Truss digging her heels in over the other tax cuts included in the UK’s recent mini-budget, sterling remains under intense pressure. JPMorgan reckons that in the absence of a change in government policy, interest rates will likely need to validate market pricing of 6% to preclude further pronounced weakness in GBP.
While the UK government’s decision not to consider any more tax cuts until a new budget in 2023 has given the market some short-term confidence, other policies to be announced in its new fiscal plan – which was originally planned for November 23 but is now expected to come sooner – could undo any hawkishness that the Bank of England (BoE) had planned, according to Charlotte Hampshire-Waugh, global head of trading payments and FX at StoneX Financial.