Far from certain new UK PM could alter gloomy tone weighing on GBP – Rabobank

Commenting on the potential impact of the latest UK political developments on the British pound, Rabobank analysts argued the new British prime minister will be unlikely to substantially alter the gloomy tone that has been weighing on the GBP.

BoE’s mandate may have to be re-examined

"While tax hikes would boost demand, they could also create further inflation and counter the current policy tightening efforts of the BoE.  This could mean further rate rises from the BoE then would otherwise be the case, which would sap the growth potential that Truss hopes to create. "

"Truss at the weekend indicated that the BoE’s mandate may have to be re-examined.  She suggested that Japan may be able to provide examples of best practices.  This, however, only served to highlight how unaware Truss is of the deflation and growth issues that have plagued the BoJ for decades.  Additionally, any further signs from Truss that she could move to reduce the BoE’s independence will not be welcomed by GBP investors given fears that she may make the Bank a lackey to vote-winning government policies."

"Given our expectation that USD strength is likely to persist for around 6 months or so in view of risks to global growth, we foresee the potential for further sharp drops in the value of the pound.  We have revised lower our target for cable from 1.18 and see the potential for a dip to levels as low as 1.12 on a 1-to-3-month view.  The assumes a more sustained break below EUR/USD1.00."