The pound, already down nearly 15% this year versus the dollar, just posted its worst monthly performance since the 2016 Brexit vote. Meanwhile, borrowing costs for businesses have jumped after six back-to-back rate hikes by the Bank of England, while expectations of further increases have shot up amidthat the country is already in the midst of a recession, pointing to rising energy costs.
Once the winner of the leadership race – most likely to be Liz Truss – is announced at lunchtime on Monday, investors will be watching closely to see whether policies implemented will mitigate or exacerbate the rout in UK assets. Strategists fear Truss could borrow heavily to fund tax cuts, further damaging the UK’s balance sheet.
“She will pick up the economic baton at an incredibly difficult time and there’s already speculation – and some frailty in the pound – to suggest that she might just drop the baton,” said Steven Barrow from Standard Bank.After a precipitous drop this year, cable is trading above $1.15, less than two US cents away from its weakest level since 1985. A gauge of momentum called fear-greed implies that sellers are firmly in control of prices.
Tineke Frikkee, head of UK equity research at Waverton Investment Management, says the benefit of any reduction in taxes by a new PM will take time to come through. “We need to get past peak inflation expectations before we can see a reversal of trends,” she said via email. “Next year could prove to be a better year for the FTSE 250.”