Sterling Positions Worst Monthly Fall Since 2016 Brexit Referendum

The pound fell 4.5 percent in August to $1.16 in its biggest monthly drop since October 2016. Sterling also fell nearly 3 percent against the euro. It began September with a further 0.3% decline against the dollar, although it was roughly flat against the common currency. The currency’s fall in August reflects a worsening outlook for Britain’s economy as the energy crisis hits businesses and consumers hard. The new prime minister, due to be appointed next week, could bring further uncertainty as they set new fiscal priorities. “Cyclical headwinds are likely to intensify for the pound in the autumn as the UK economy moves forward with fresh fiscal initiatives against rising energy costs and the consumer price index,” JPMorgan analysts said last month. Liz Truss, front-runner to win the Tory leadership contest, has pledged to deliver £30 billion in tax cuts as part of a plan to shore up the UK economy against a worsening cost of living crisis. Economists say a loosening of fiscal policy could soften the recession predicted by the Bank of England and many City economists to start later this year. But some analysts said such a stimulus could make it harder for the BoE to tackle the worst period of inflation in more than 40 years. Philip Shaw, chief economist at Investec in London, said the rapid fall in sterling was “very worrying” as it underlined concerns that if Truss was appointed prime minister, her government’s policies would diverge from the BoE. UK debt markets also sold off in August, with a broad Bloomberg index tracking government and corporate debt falling more than 6%, much worse than regional peers including Germany and France. The sell-off sent the 10-year public sector borrowing cost in the bullion market soaring more than 0.9 percentage points, the biggest rise since at least 1989. In equities, the FTSE 250 index of UK-listed mid-cap stocks, which are seen as more sensitive to the domestic economic outlook than those listed on the more internationally focused FTSE 100, fell 5.5 per cent in August. George Saravelos, global head of FX research at Deutsche Bank, said investors were right to question whether the UK fiscal and monetary mix was appropriate and how it would affect inflation. “Price pressures are becoming persistent and broader. But what kind of message is the UK government sending about inflation?’ Saravelos said, adding that the BoE has not been as aggressive or effective in its communications about inflation risks as either the US Federal Reserve or the European Central Bank. Saravelos said the reaction of foreign exchange markets to aggressive fiscal promises that were not funded or a broad cut in the VAT tax is likely to be less favorable than help in energy bills aimed at the relevant income groups. The pound also retreated from a broad-based rally in the US dollar last month as traders bet the Fed will pursue a strategy of aggressive rate hikes in the coming months. But the pound’s fall in August was even sharper than any of the G10 currencies except the Swedish krona. There are indications that pressure on the currency could ease. Speculators, including funds that trade currency derivatives, have reduced their bearish bets on sterling in recent weeks. The group now has a net futures short position of 27,966 contracts, compared with a recent high of 80,372 at the end of May, according to Commodity Futures Trading Commission data compiled by Bloomberg. “Leveraged funds have no aggressive shortage [sterling]said Stephen Gallo, head of European FX strategy at BMO Capital Markets. “Other fund managers – asset allocators – are reducing their sterling hedging risks, which suggests they are limiting their exposure to UK assets. However, it is not clear whether these recent movements are due to short-term portfolio flows or shifts in long-term FDI flows.” Large international investors reduced their exposure to the UK stock market in July, with a net 15% of global fund managers reporting an “underweight” position on UK equities, down 11 percentage points from the previous month’s position, according to Bank of America, which polled 250 respondents with combined assets of $752 billion.

title: “Sterling Positions Worst Monthly Fall Since 2016 Brexit Referendum Klmat” ShowToc: true date: “2022-10-27” author: “Julio Mcclellan”

The pound fell 4.5 percent in August to $1.16 in its biggest monthly drop since October 2016. Sterling also fell nearly 3 percent against the euro. It began September with a further 0.3% decline against the dollar, although it was roughly flat against the common currency. The currency’s fall in August reflects a worsening outlook for Britain’s economy as the energy crisis hits businesses and consumers hard. The new prime minister, due to be appointed next week, could bring further uncertainty as they set new fiscal priorities. “Cyclical headwinds are likely to intensify for the pound in the autumn as the UK economy moves forward with fresh fiscal initiatives against rising energy costs and the consumer price index,” JPMorgan analysts said last month. Liz Truss, front-runner to win the Tory leadership contest, has pledged to deliver £30 billion in tax cuts as part of a plan to shore up the UK economy against a worsening cost of living crisis. Economists say a loosening of fiscal policy could soften the recession predicted by the Bank of England and many City economists to start later this year. But some analysts said such a stimulus could make it harder for the BoE to tackle the worst period of inflation in more than 40 years. Philip Shaw, chief economist at Investec in London, said the rapid fall in sterling was “very worrying” as it underlined concerns that if Truss was appointed prime minister, her government’s policies would diverge from the BoE. UK debt markets also sold off in August, with a broad Bloomberg index tracking government and corporate debt falling more than 6%, much worse than regional peers including Germany and France. The sell-off sent the 10-year public sector borrowing cost in the bullion market soaring more than 0.9 percentage points, the biggest rise since at least 1989. In equities, the FTSE 250 index of UK-listed mid-cap stocks, which are seen as more sensitive to the domestic economic outlook than those listed on the more internationally focused FTSE 100, fell 5.5 per cent in August. George Saravelos, global head of FX research at Deutsche Bank, said investors were right to question whether the UK fiscal and monetary mix was appropriate and how it would affect inflation. “Price pressures are becoming persistent and broader. But what kind of message is the UK government sending about inflation?’ Saravelos said, adding that the BoE has not been as aggressive or effective in its communications about inflation risks as either the US Federal Reserve or the European Central Bank. Saravelos said the reaction of foreign exchange markets to aggressive fiscal promises that were not funded or a broad cut in the VAT tax is likely to be less favorable than help in energy bills aimed at the relevant income groups. The pound also retreated from a broad-based rally in the US dollar last month as traders bet the Fed will pursue a strategy of aggressive rate hikes in the coming months. But the pound’s fall in August was even sharper than any of the G10 currencies except the Swedish krona. There are indications that pressure on the currency could ease. Speculators, including funds that trade currency derivatives, have reduced their bearish bets on sterling in recent weeks. The group now has a net futures short position of 27,966 contracts, compared with a recent high of 80,372 at the end of May, according to Commodity Futures Trading Commission data compiled by Bloomberg. “Leveraged funds have no aggressive shortage [sterling]said Stephen Gallo, head of European FX strategy at BMO Capital Markets. “Other fund managers – asset allocators – are reducing their sterling hedging risks, which suggests they are limiting their exposure to UK assets. However, it is not clear whether these recent movements are due to short-term portfolio flows or shifts in long-term FDI flows.” Large international investors reduced their exposure to the UK stock market in July, with a net 15% of global fund managers reporting an “underweight” position on UK equities, down 11 percentage points from the previous month’s position, according to Bank of America, which polled 250 respondents with combined assets of $752 billion.