Last month, when then-Chancellor of the Exchequer Kwasi Kwarteng announced sweeping tax cuts in the U.K., the currency markets reacted with swift retribution for what was perceived as a reckless decision that prioritized free market zeal over fiscal responsibility.
In the weeks since, the government responded with a series of embarrassing u-turns that culminated in Kwarteng’s dismissal on Friday (Oct. 14) and the appointment of a more moderate candidate, Jeremy Hunt, to take over the reins of Britain’s treasury.
In his first move as chancellor, Hunt, who has served in ministerial roles under the previous three governments, backtracked on the remainder of Kwarteng’s ill-fated tax cuts and sought to rein in government spending.
Although the pound’s rally on Monday morning (Oct. 17) suggests optimism about his plans for the U.K. economy, traders are still wary of the country’s precarious political situation as markets aren’t out of the turbulent water yet.
Related: Pound, Euro Instability Signals Stress Ahead for Europe’s FinTech Ecosystem
In fact, long before last month’s budgetary announcement, experts had been pointing to worrying signs that the pound isn’t the stalwart of the global economy it once was.
For several years, the difference between rates at which investors were willing to buy and sell sterling was larger than in other major currencies. But back in 2020, a Bank of America analyst noted that the currency’s behavior since the 2016 Brexit vote could be described as “neurotic at best, unfathomable at worst.”
And BofA analysts are not the only ones to have observed this downward trend.
In other words, while the dollar may be able to ride the ups and downs of American political drama relatively unscathed, as recent weeks have forcefully demonstrated, the pound appears increasingly vulnerable to national crises, putting the U.K. economy itself at risk.
Consumers, Businesses Crave Stability
For British consumers, the newfound volatility has created significant difficulties for people’s ability to plan ahead, not to mention the current inflationary environment in which price increases are far outpacing growth in wages.
See more: UK’s 10% Inflation Rates Stretch Consumers’ Paychecks and Patience
An unstable pound also creates a major headache for retailers and wholesalers when it comes to imports and exports, as Bryan McSharry, the CEO of Moneycorp Europe, told PYMNTS in a recent interview.
Read the interview: FX Hedging Strategies Get Fresh Look From SMBs Amid Pound’s Slump
For example, if the pound falls too low against the euro it creates significant headwinds that could affect the ability of companies exporting to the U.K. turn a profit. And for those importing from the U.K., a weak pound might allow them to buy goods at a cheaper price, but they also need to factor in variable future demand.
From all indications, the new treasury chief has his work cut out for him and is expected to work closely with the Bank of England to bring inflation under control and introduce a degree of stability that is essential for U.K. consumers and merchants to be able to spend confidently.
Related: BNPL Offers Lifeline as UK Consumer Sentiment Hits All-Time Low
Beyond that, the real challenges will be rebuilding the U.K.’s reputation for sound financial management, maintaining sustainable growth without sacrificing economic security, and decoupling the sterling from the political soap opera that, after all, most countries have to navigate from time to time.
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