Pound Sterling markets were on a rollercoaster ride Friday as political uncertainty weighs heavily on the currency. However, with the latest announcement from UK Chancellor Philip Hammond, the Pound looks to be headed for further gains. In addition, the latest stimulus from the Government will likely boost inflation pressures. At the same time, the Japanese Yen is under pressure from the Bank of Japan’s dovish policy.
Pound Sterling markets had a rocky ride on Friday
The pound has had a rough ride over the last couple of days. A soaring dollar and a wide current account deficit have put pressure on the pound in the past. The Plaza Accord stabilized the foreign exchange market in 1985, but the dollar’s strength has weakened the pound in recent years. The UK’s debt management office increased its gilt sale plan for fiscal year 2022-23 by PS62.4 billion compared to analysts’ expectations of a PS60 billion increase.
However, the UK government is putting together a new plan to bring the economy back on track. The new plan is backed by the government’s fiscal plans but has been met with a mixed reaction from investors. Many fear that the government’s new tax plans could cause inflation to rise and force the Bank of England to tighten further. The IMF has issued a rare statement expressing its concern over the UK’s plan. This has spooked the bond market and the British pound. It also caused the 10-year gilt yield to rise to its highest level since 2008.
Political uncertainty weighs on the Pound
Pound Canadian Dollar exchange rate fluctuated erratically last week amid UK political uncertainty and the Bank of Canada interest rate hike. The Pound was weighed down by UK political uncertainty as the Conservative party was still trying to narrow down its number of candidates for prime minister and investors were wary of the ‘unrealistic’ tax cuts proposed by the current government. However, there was a modest tailwind from positive UK GDP numbers, which showed a 0.5% expansion in May, beating out expectations of a 0.2% contraction.
Sterling’s losses have been driven by political uncertainty, and the pound is no exception. Although the UK government’s Brexit process is largely successful, the current political climate is threatening to push the Pound even lower. There is a great deal of uncertainty surrounding the upcoming General Election, and the Brexit process in general. The upcoming election and the prospect of a hung parliament were also factors in the currency’s decline in 2015.
Government stimulus likely to boost inflation pressures
GBP/USD rallies after new UK Chancellor Jeremy Hunt announces revised fiscal plans. Jeremy Hunt will speak to the House of Commons later today to announce new spending and tax policies. The new Chancellor is a seasoned politician, but his first task will be to calm the market. Jeremy Hunt says the measures he is planning will restore confidence.
The government’s bungled attempt to reduce tax rates has stoked investors’ fears about the UK’s fiscal health. Although Kwarteng’s announcement may not have changed investor sentiment, it is likely to fuel speculation. Meanwhile, the Office of Budget Responsibility is due to release updated projections in late October. A fall in gilt yields would lower projected interest costs, helping to close the fiscal hole.
Japanese Yen under pressure by dovish Bank of Japan
The Japanese Yen is under pressure after the Bank of Japan made dovish remarks at a press conference last week. Although the BoJ policymakers are expected to keep monetary policy unchanged, the currency is expected to remain volatile in USD terms. This could result from increased capital outflows from Japan. Furthermore, rising commodity prices are also expected to have a negative impact on the terms-of-trade in Japan.
The dovish message of BOJ Governor Haruhiko Kuroda has contributed to the rapid decline of the yen. While the BOJ has ruled out a near-term withdrawal of stimulus, he does believe that wage growth needs to be more pronounced to sustainably reach its 2% inflation target. The weak yen has weakened the value of Japanese exports, putting a strain on companies. It has also raised the cost of living. As a result, Japanese companies are now shifting their production to other countries.