HGV crisis: 'Unreasonable' to blame Brexit says Rishi Sunak
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Boris Johnson and his Conservative Party have been engulfed in several crises, with Britain scrambling for scarce petrol supplies, supermarket shelves still empty leading and traders sending the pound plunging. This has not gone unnoticed by international investors, who are keeping an extremely close eye on the hugely volatile British currency. One-month implied volatility in the pound – a market-based gauge of investors’ expectations for swings in the currency – has surged to its highest level since March.
At this time, the consequences of the ongoing Covid pandemic were still a huge concern among investors, but now markets are increasingly warning they do not expect sterling’s fortunes to dramatically improve anytime soon.
Last week, the pound slid to its lowest levels against the US dollar this year, with investors now losing faith in the Government’s ability to guide the UK through the current crises.
The currency tumbled two percent to sink to its lowest level since December and despite rebounding slightly this week, investors are still preparing for a volatile winter.
Jane Foley, currency analyst at Rabobank, warned: “The extent of the sell-off that we saw in sterling, despite the fact that it was after some hawkish remarks from the [BoE] Governor, did highlight something was going wrong.
“That is behaviour that you are more likely to see in an emerging market currency than a G10 currency, that’s for sure.”
The Conservatives have attempted to reassure markets at this week’s annual party conference, with Lord Frost declaring “British Renaissance has begun”.
But investors are questioning whether the Government has the ability to manage a post-Covid, and Brexit Britain.
Financial analysts have been warning the severe shortages in skilled workers and goods, particularly when linked to the fuel crisis, have placed a dark cloud over the Government’s ability to sufficiently manage the economy.
There are also fears over whether the Bank of England can contain inflationary pressures as prices continue to surge.
Traders are now becoming increasingly worried problems are only starting to pile up, predicting a further fall in the pound against the US dollar, which has been hovering just above $1.36.
Derek Halpenny, head of global markets research at MUFG, warned the British currency could plunge to as low as $1.30 – levels not seen in nearly a year.
He said: “For many investors, it’s the first time probably in their careers that they’re actually looking at a scenario like we’re in or entering: a real credible prospect of a period of stagflation.”
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Berenberg economist Kallum Pickering also warned: “The panic and hysteria in the UK partly reflects a growing lack of confidence by the public in the Government’s ability to manage the economy and fix problems when they arise.”
He compared panic buying to bank runs by shoppers lacking confidence, warning it risks becoming a “feature of the UK economy”, which “remains one of the richest and, at least until recently, well managed in the world”.
Mr Pickering added: “A noisy and economically damaging Brexit followed by a worse than average response to the pandemic has left the UK public and financial markets with more than a faint impression that the UK is performing well below its potential.”
Before the latest crises engulfing the country, the pound was extremely vulnerable to a slide on currency markets if confidence overseas dwindled because Britain has a large current account deficit – when the value of imports of goods, services and investment is greater than that of exports.
Rabobank currency analyst Jane Foley further warned: “It brings the potential for overseas investors to turn their back on the pound.”
Brexit fears continue to persist, with the UK and European Union at loggerheads over the Northern Ireland Protocol, with Britain threatening to trigger Article 16 that would completely overhaul large parts of the trading mechanism.
Nomura currency analyst Jordan Rochester warned: “The hangover and scarring of investor confidence from Brexit is still there.
“That plays a part in investment decisions for investors when it comes to the pound.”
Rabobank currency analyst added: “Until the Government can prove that its post-Brexit policies are functioning efficiently, sterling could remain vulnerable.”
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