Following a summer of campaigning, Liz Truss has become the new leader of the Conservative Party, and the new Prime Minister of the UK. Despite Truss’ success, the UK’s third female PM enters Number 10 during one of the most challenging economic periods in history.
Sterling dropped to its lowest since March 2020 this week, as markets worry over soaring inflation, and a cost-of-living crisis that is driving the UK towards a recession. Despite a small bounce back this morning to $1.16, there is little optimism for the pound both domestically and internationally, and GBP remains far below the heights of $1.447 seen in summer 2021.
GBP vs USD so far this year. Source – XE.com
The first major challenge for the new Prime Minister is of course in the energy market. Sky-high energy bills are already pushing households and businesses to the brink, and with the price cap set to climb again by 80% in October inaction is no longer an option. An energy cap freeze seems to be the likely outcome, with an announcement expected in the coming days. How this cap will be funded however is in question, with the cost expected to reach hundreds of billions, and will be one of the first tests for Truss’ policy direction.
With Russia now closing off gas supplies to the EU, and OPEC+ reducing oil output, gas and oil are both expected to rise in price further. A extension to the windfall tax on the extreme profits made by producers has been called for, but the new PM has campaigned on a low-tax economy and seemed unwilling to further tax even these companies. Low taxes for companies and individuals will do little to help fund the massive spending the government has undertaken in the past three years, and could also fuel further inflation.
Energy policy is just one of the headaches facing the government however, team Truss have strongly hinted that the Bank of England could face further scrutiny. The Bank’s Monetary Policy Committee – the group responsible for setting interest rates – have acted independently since 1997. With inflation now many times higher than the Bank’s 2% target, some in the government have questioned whether the BoE was too slow to raise rates, and whether there should be a closer relationship between the MPC and the government over rates.
Brexit is another key matter still to be resolved by Truss and her new cabinet. Despite initially campaigning for remain, the new PM is seen as having a more right-wing, hard-line stance on Brexit. With the Northern Ireland Protocol remaining a sticking point, many will be watching closely to see what direction talks take with a new PM at the helm. Any collapse in the talks could result in a trade war, and have far reaching implications for Northern Ireland and the border with the Republic.
For UK investors the next few weeks could see some volatility in the pound, and therefore in precious metals. If markets seem reassured that the UK economy is on a sound path then Sterling could rally, pushing gold prices down. If inflation continues to rise, while UK debt soars, confidence could be lost in Sterling and cause a currency crisis not seen since the 1970s, further supporting gold domestically.
