Pound climbs despite confidence vote and US forecasts of a ‘crisis’
THE value of the pound pushed higher as markets bet that last night’s substantial rebellion against Boris Johnson could end up watering down the UK’S Brexit policy on Northern Ireland, alleviating fears of an EU trade war.
It came as Rishi Sunak, the Chancellor, was forced to defend the outlook for sterling after one of Wall Street’s biggest banks said it was behaving like an emerging market currency. The Chancellor insisted he is not concerned about the strength of sterling, adding that he had “confidence in the mediumterm outlook for the economy” despite soaring inflation.
Sterling surged as much as 0.7 per cent against the dollar yesterday before easing back to trade 0.4 per cent higher at just over $1.25 and up 0.6 per cent against the euro. The pound is down over 7 per cent against the dollar this year, making it one of the worst performing major currencies so far in 2022.
While previous confidence votes against former prime ministers have dented the pound, broader economic unease clouded the outlook as MPS voted on Mr Johnson’s future.
Economists said that Mr Johnson’s plans to scrap the Northern Ireland Protocol, part of Britain’s post-brexit trade agreement, has sparked fears of a trade war with Brussels.
Philip Shaw, chief economist at Investec, said: “The line of thinking is that if there is a change in leadership of the Conservative Party then the UK’S policy on Northern Ireland and Brexit could soften, thus alleviating the fears of a trade war.
“The other factor is that the UK is suffering under a cloud of uncertainty and perhaps the vote of no confidence is the beginning of the process of lifting that cloud one way or the other.”
Jane Foley, from Rabobank, said the gains could be triggered by hopes that British politics “could be on the brink of pushing beyond scandal and distraction”. She said: “Whether or not Johnson survives the confidence vote, [sterling] investors will be hoping it will clear the air and allow [the] Government to move on with the job in hand.”
It came after Bank of America, a top US lender, warned that the pound was facing an “existential crisis”. Analyst Kamal Sharma said a “unique” combination of pressures had resulted in a “confusing communication strategy” from the Bank of England, which had been accused of repeatedly wrong-footing markets last year.
He said the pound “is no longer the doyen of foreign exchange markets that investors think it is”.
Addressing MPS on the Treasury select committee, Mr Sunak said current economic conditions had been driven by “global shocks” that were also affecting the United States and Europe.
He said: “I’m confident that we have the tools and the determination to get inflation down over time.”
Mr Sunak told MPS that the £16 billion spending package he recently announced to help households deal with soaring energy bills would have a “minimal” impact on overall inflation, which is at a 40-year high. He said: “What we don’t want to be doing is fuelling further excess discretionary spending, which would make the situation potentially worse.”
The Chancellor introduced a £400 discount on energy bills in a statement last month, a relief that will be partially funded by a windfall tax – slated to raise £5 billion – on the North Sea oil and gas producers.
Mr Sunak also admitted the Treasury is not sure how much money the levy will bring in.
“[We’re] now having those conversations with the industry to ascertain the scale of those extraordinary profits,” he said.
He indicated the windfall tax may be wound down once benchmark Brent crude oil returns to pre-pandemic levels of around $60 to $70 a barrel.