Sterling Slumps to 15-Month Low of 1.1810 as Britain's Political Tensions Increase

Sterling Slumps to 15-Month Low of 1.1810 as Britain’s Political Tensions Increase

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Azeez Mustapha

Updated: 13 October 2022

Sterling (GBP) slumped to its lowest point since March 2020 on Tuesday as the US dollar posted an aggressive rebound and as political uncertainty displaced GBP traders.

Already under strain from worsening inflation, Brexit tensions, and the risk of a recession, the British economy came under fresh pressure following Boris Johnson’s resignation as prime minister last Thursday. A source familiar with the matter told reporters that the Labour Party, Britain’s main opposition, will forward a motion for a no-confidence vote in the former PM’s government today, with the voting expected to occur on Wednesday.

Meanwhile, senior economist at Standard Chartered Sarah Hewin explained: “Sterling will be buffeted by leadership questions as there is a question about the extent to which we will see a conservative leader who is intent on fiscal discipline or a prime minister intent on unfunded tax cuts, which would trigger a more aggressive response from the Bank of England.” Hewin added: “Until the leadership question is decided, sterling may stay volatile.”

As politicians express intentions to sweep up the vacant PM position, the issue of tax cuts has become a central topic, with almost all candidates promising to implement business or personal taxes cuts. However, the most likely to emerge at the moment, former Chancellor Rishi Sunak, is the only candidate to have understated the prospect of tax cuts.

Sterling Under Additional Pressure from Weak Economic Data

Away from politics, weakening economic standings have exerted additional pressure on the British pound. Analysts expect the UK’s May GDP data release to be published on Wednesday to show no growth. A no-growth GDP report will reinforce expectations of an economic contraction in Q2 2022.

Meanwhile, weekly positioning data exhibited slight signs of an increase in short GBP bets to $4.2 billion. Regardless, the figure remained well below the November 2019 high of $6.3 billion.

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