The pound rate and FTSE100 in light of the political turmoil in the UK

17.10.2022 10:12|Conotoxia Ltd Analyst Team

Changes on the British political scene could be important for the pound exchange rate, as well as for the entire British financial market, including the future of Prime Minister Liz Truss' government. As recently as the end of last week, the UK media began to speculate about changes in the position of Chancellor of the Exchequer, which then actually took place.

Falling pound as a result of a flawed plan?

Kwasi Kwarteng, the former chancellor who resigned on Friday, was responsible for planning the UK's massive tax cuts. The plan was perhaps simple - let the British have more money in their pockets, as the cost of living is rising and inflation is not letting up (that sentence alone may show the absurdity of the idea). The difference between the previously planned UK budget and the lack of tax revenues by cutting them was to be patched up by issuing bonds. At the mere thought of this, the debt market crashed, and the Bank of England had to intervene. The British pound also collapsed, falling at one point to $1.0350. That's when speculation began that perhaps GBP-USD parity was possible by the end of the year.

pound_rate_quotes

Source: Conotoxia MT5, GBP / USD, Daily.

End of BOE interventions and new Chancellor of the Exchequer

Bond market interventions led by the Bank of England were scheduled to end on Friday, October 14. That was when Kwasi Kwarteng resigned, and was replaced by Jeremy Hunt. It may now be on his shoulders to come up with a new plan for British taxes, as well as to restore confidence in the government of Prime Minister Liz Truss, who has received 100 letters of no confidence. They were submitted by Conservative Party MPs, the Sunday Times and Sunday Express reported. 

According to British local media, Prime Minister Liz Truss is fighting for her political survival. They indicate that her party may call for her resignation as early as this week. Reports published by the Guardian, Daily Record and Daily Mail, noted Monday that a number of MPs have formed a "conspiracy to oust" Truss, claiming that her "game is up." The Tories were holding "secret talks" over the selection of a new party and cabinet leader, one report claimed, the BBN news service reported.

ftse100_chart

Source: Conotoxia MT5, UK100, Weekly

Goldman Sachs on the UK - will there be a recession?

British Prime Minister Liz Truss has announced that she would maintain the previous government's planned increase in corporation tax from 19 to 25 percent. "This will raise £18 billion a year. It will act as a down payment on our full medium-term fiscal plan," the details of which Hunt is expected to unveil by the end of the month. Goldman Sachs analysts downgraded their UK economic forecasts after Prime Minister Liz Truss expressed her desire to raise corporate tax. Significantly tighter corporate finance conditions and higher taxes on corporations from next April, led to the downgrade of the UK's growth forecast. "A more significant recession is now expected." - Bloomberg quoted a report by Goldman Sachs bank as saying. In an analysis published Sunday, GS analysts believe the British economy will contract by 1 percent next year (they had previously forecast a 0.4 percent drop in GDP).

Pound exchange rate - what to expect?

The specter of a deeper recession, more difficult financing for businesses, still high inflation, political uncertainty, could still take its toll in the near future on the GBP or FTSE100 quotations, which seem to be trying to stabilize after the recent period of great turbulence.

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Daniel Kostecki, director of the Polish branch of Conotoxia Ltd. (Cinkciarz.pl investment service)
 
The above trade publication does not constitute an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No. 596/2014 of April 16, 2014. It has been prepared for informational purposes and should not form the basis for investment decisions. Neither the author of the study nor Conotoxia Ltd. shall be liable for investment decisions made on the basis of the information contained herein. Copying or reproduction of this study without written permission from Conotoxia Ltd. is prohibited.

 

 

 

 

 

 

 
 

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