GBP continues to face a very difficult few months ahead – HSBC

Liz Truss has won the Conservative Party leadership election and is set to become the UK’s new Prime Minister – the fourth in six years – succeeding Boris Johnson. Looser fiscal policy may present potential upside for GBP but greater risks are to the downside regarding the UK’s relationship with the EU and broader institutional integrity, economists at HSBC report.

New Prime Minister, same old challenges

“The new PM’s plans to loosen the purse strings should provide an upward impetus to growth and inflation, which may result in a shift higher in rate expectations. This could be positive for the GBP at the margin. But it comes with significant risks. The UK’s long-term fiscal position is a big constraint which could worry investors, and if the market sees higher inflation persisting, then it can also drag on the GBP.”

“There are few signs that Ms. Truss will take a conciliatory approach to discussions with the EU. With the EU accounting for around 50% of UK exports, any policy decisions that cause a further deterioration will weigh even more on the UK’s increasingly worrying external imbalances, thereby leaving the GBP more open to volatility and lower long-term valuations.”

“Ms. Truss has been critical of the Bank of England (BoE), suggesting there could be changes to the inflation-targeting mandate or even a review of the BoE’s independence. A big shake-up of the UK’s most important financial institution could create uncertainty for investors and weigh on the GBP.”