Pound's gains wiped off after tax-grab budget leads toward retail sales outlook

FXOpen

The monumental and sustained decline in value that blighted the British Pound over recent months in which it almost went into freefall with no sign of an end suddenly began to show signs of improvement a couple of weeks ago when Liz Truss, the British Prime Minister to hold the shortest tenure in office in British history - just 44 days - resigned.

Her resignation was considered a positive step by the markets, as along with her leaving her office, an equally short-lived stint in office for Chancellor of the Exchequer (Finance Minister) Kwasi Kwarteng also came to an end.

During Ms Truss' 44 day term as Prime Minster, she ramped up the rhetoric against Russia, presided over a disastrous mini-budget which was canceled the moment she left office, and created a sense of nervousness in the markets.

The pound began to recover after her tenure as Prime Minister ended, and although still very much in the doldrums and having not managed to reach 1.18 against the US Dollar which by contrast has been a very strong currency over recent months, the economic woes in the United Kingdom have been too grave to ignore.

Last week, new Prime Minister Rishi Sunak along with new Chancellor of the Exchequer Jeremy Hunt unveiled their new budget, which was laden with significant socialist-style tax increases, right at a time when the economy is in limp-home mode following the hundreds of billions which flowed out of the coffers during 2020 and 2021 under Mr Sunak's watch as Chancellor.

The pound crashed in value once again yesterday during the hours of the London trading session, and although it is not down to the low levels that it reached at the end of Ms Truss' tenure at Number 10 Downing Street, it did head back to the low 1.18 range.

It appears that the confidence-busting high-tax budget which now causes the average British household to be even more cash-strapped during what is being dubbed a 'cost of living crisis', and the potential that some high net worth individuals or companies with international offices may move their wealth to more tax-friendly jurisdictions, has caused investors and traders to take a conservative view once again.

This drop came in at exactly the time when earnings reports from many publicly-listed retail giants are about to be released, and whilst we do not know what those figures may be as yet, it is estimated by many analysts that they could be a bit lower than usual at this time of year due to people simply not having as much disposable income available as they once did, and the government's imminent interest rate rises which are estimated to reach around 5% by January 2023 as inflation soared over the 11% mark in Britain by Friday last week.

By contrast, the United States, whilst still blighted by high inflation over the past year, is not fairing so badly at all. At the end of last week, inflation in the United States actually decreased to 7.7%, and whilst that may still sound a lot compared to the levels that it stood at by the end of last decade, it is far lower than the 10% it reached by the summer of this year.

By no means is the United States economy out of the woods yet, but it is certainly showing signs of returning to some degree of fortitude.

Britain, by contrast, battles on with serious challenges ahead.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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