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Written by: George Prior
Expect the pound to fall even further and more radically next week should Liz Truss be named UK Prime Minister as is expected, warns the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations.
The warning from Nigel Green of deVere Group, which has more than $12bn under advisement, comes as the UK currency has registered its most dramatic monthly decline against the dollar since October 2016 – the height of the Brexit referendum fallout.
Sterling fell 4.5% in August to $1.16 and almost 3% against the euro. It has started September with a further 0.3% drop against the U.S. dollar.
He says: “This is alarming – and we expect it to get worse for the pound when the UK’s new Prime Minister is announced next week.
“Should the front runner, Liz Truss, win, as is expected, it can be reasonably assumed sterling will plummet further. It is already one of this year's worst performing major currencies.”
The beleaguered pound is set to be given a continued beating amid heightening political and economic uncertainty, noted the deVere CEO.
“We expect that Truss’s planned £30bn in tax cuts would push up inflation by increasing money growth, prompting more aggressive interest rate increases from the Bank of England as it struggles to control inflation which is running hot at a four-decade high.
“In addition, Truss’s populist agenda – including the UK’s relationship with the EU and single market access and issues with the Northern Ireland Protocol – would trigger a negative reaction by the already weak pound.”
The likely successor to Boris Johnson has also suggested reviewing the Bank of England’s mandate.
“We expect a coming War of Independence with the Bank of England. This potential tussle and the politicization of the UK’s central bank is likely to create considerable uncertainty which will spook financial markets,” Nigel Green recently said.
It is widely acknowledged amongst economists that central bank independence is one of the reasons why inflation fell over the decades.
He went to add: “Taking back control sadly doesn’t always mean making the right decisions. We can expect the pound and the gilt market to react badly to any sense of growing political interference.”
Investors with major exposure to UK financial assets should review their portfolios, he suggests. “As ever, portfolio diversification across asset class, sectors, regions and currencies is an investor’s best tool to mitigate risk and seize opportunity.”
The deVere CEO concludes: “Intensifying political and economic turbulence is going to continue to deliver a bloody nose to the embattled pound over the next few months.”
Related: September Is Usually Grim for Stocks, This Year Could Be Different – Here’s Why