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Wednesday, July 06, 2022

The National - British pound under further pressure after cabinet ministers quit

By Century Financial in Century in News

The National - British pound under further...
Vijay Valecha, Special to The National July 6, 2022

The British pound continued to face sell-off pressure on Wednesday after slipping to a two-year low against the US dollar on the news that Sajid Javid and Rishi Sunak, senior members of the UK cabinet, had resigned, and more minor departures came thick and fast.

The pound dropped as much as 1.8 per cent against the dollar to 1.1899 on Tuesday — its lowest level since March 2020. Sterling pared back some of its losses on Wednesday and was trading at 1.1922 at 11.42am UK time, according to Bloomberg.

“After a brutal session, sterling is recovering some of its losses today,” Naeem Aslam, chief market analyst at Avatrade, said in a note on Wednesday. “Yesterday was one of the worst days for sterling since February this year as the price briefly violated the support of 1.19 against the dollar.

“Looking at the GBP/USD price action today, it is very clear that the sell-off is still not clear and it is highly possible that we will see the sell-off again. But for now, traders are booking some profits and this has pushed sterling higher today.”

Mr Sunak and Mr Javid resigned from their positions as Chancellor of the Exchequer and health secretary on Tuesday night, piling more pressure on embattled Prime Minster Boris Johnson to step down.

The resignation of Mr Sunak could create more uncertainty for the weakening pound and the UK economy amid soaring inflation, Brexit concerns and fears of recession, Mr Aslam said.

Sir Jon Cunliffe, deputy governor of the Bank of England, sought to reassure markets that the monetary authorities would quash inflation before it becomes rampant in the system on Wednesday.

“We will do whatever is necessary to ensure that as this period of inflation goes through the economy, it does not leave us with a persistent domestically generated inflation problem,” the policymaker said. “We will act to make sure that doesn't happen.”

Mr Johnson’s appointment of Nadhim Zahawi as the new Chancellor may also fail to ease market jitters, Mr Aslam said.

“This is because, with the appointment of a new cabinet, it could mean a set of new policies and a lot of unanswered questions,” he added.

“Rishi Sunak did a good job during the Covid crisis by keeping the UK’s economy from a complete disaster and the public had somewhat confidence in his abilities to bring the UK economy out of the current recessionary environment.”

In May, inflation in the UK hit an annual rate of 9.1 per cent — a new 40-year high — driven by a broad range of price increases, including for fuel, electricity and food.

On Tuesday, the Bank of England said the economic outlook for Britain and the world had darkened and told banks to ramp up capital buffers to ensure they could weather the storm.

It also said it would conduct an in-depth analysis to enhance surveillance of “opaque” commodity markets after Russia's invasion of Ukraine left the central bank without a full picture of risks and vulnerabilities.

“In addition to this, the Brexit agreement is once again in jeopardy as Boris Johnson wants to walk away from some of the deals agreed with the EU about Northern Ireland, which created a risk of a trade war,” Mr Aslam said.

“Now with the new cabinet and his new team players, traders are more concerned about the government's Brexit stance.”

Meanwhile, the strong dollar was partly to blame for the pound's fall on Tuesday, according to Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“The political turmoil in the UK certainly added to the selling pressure on the sterling, however, the reason why cable slipped below the 1.20 mark was a booming US dollar, across the board,” Ms Ozkardeskaya said.

The dollar — the world's reserve currency — surged to its strongest level in more than two years on Tuesday as concerns about recession prompted investors to pile into safe-haven assets, Bloomberg reported.

The pound is down almost 12 per cent against the dollar year-to-date, Edward Bell, senior director of market economics at Emirates NBD said in a note.

“We had cautioned a few weeks ago that our Q3 targets for GBP/USD at 1.20 … would be upside caps on prices and the disorderly sell-off in currency markets overnight with limited policy responses shores up our view,” Mr Bell said.

“We expect that the US dollar will remain a relative outperformer thanks to policy differentials favouring the greenback as well as investors seeking it as a haven asset.”

However the pound could fall even further this week, Vijay Valecha, the Dubai-based chief investment officer at Century Financial, said.

“Worries about the recession continue to loom as central banks move to fight multidecade-high inflation with higher interest rates, risking triggering an economic slump by pulling down demand,” he said.

“We could see sterling test the 1.1850 to 1.1900 level this week.”

The National