The value of the pound did not significantly shift when Liz Truss was declared the winner of the leadership contest for the Conservative Party; but, it had recovered some ground after reaching a nearly four-decade low earlier in the day.
After the announcement, the pound initially made a few steps forward, but it didn’t take long for those gains to be erased, and an hour later, it was trading at 1.1483 against the dollar, which is a tiny decrease.
According to Chris Beauchamp, chief market analyst at trading platform IG, “There has been little reaction in terms of the markets, given the announcement was very much a known outcome.”
However, the weak performance of the pound against the dollar makes it very evident that market participants are not overly hopeful about the future of the UK.
It’s possible that a substantial enough program of support could buy her some time, but investors will be keeping a careful eye on the situation.
At the same time, the FTSE 100 was able to recover some of the ground it had lost, as it increased from a day-low of 7,191 to a level of approximately 7,268 in the early afternoon.
Earlier in the day, the value of one pound in sterling reached its lowest point in relation to one dollar in 37 years.
It reached a low of 1.1443 dollars per pound for a brief period of time, which is lower than the 1.14506 dollars per pound it reached on March 19, 2020.
Due to the fact that the majority of international trade is conducted in dollars, the decline will result in a significant increase in the cost of imports for people living in the United Kingdom. Travelers going on vacation to the United States will also be affected.
In 1985, when sterling had last been lower, countries banded together to artificially weaken the dollar against its foreign rivals, particularly the German deutsche mark and the Japanese yen. This was done to prevent sterling from reaching a lower level.
As the dollar maintains its steady ascent, it is anticipated that the pound will keep moving closer and closer to reaching its goal of parity with the US dollar.
The G5 nations of Germany, the United Kingdom, the United States of America, France, and Japan came to an agreement in the so-called Plaza Accord to work toward depreciating the dollar. This agreement was named after the hotel in New York City where it was signed.
The rapid appreciation of the US dollar over the past five years has been detrimental to the competitiveness of American manufacturers, as it has made foreign goods less expensive for consumers in the US to purchase.
An expert at Markets.com named Neil Wilson predicted that this time around, there would be no Plaza Accord to come to our rescue.
According to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, Ms. Truss’s premiership is expected to be detrimental to the value of sterling over the course of the longer term.
According to Ms. Ozkardeskaya, she has the ability to shift the focus of the Bank of England away from containing inflation and toward fostering economic expansion.
“The pound is projected to continue its trip toward parity against the US dollar, as the dollar continues growing relentlessly,” she added. “Parity” refers to a situation in which two currencies have the same value.
Fiona Cincotta, a senior financial system industry expert at City Index, made the following statement prior to the result obtained being announced and the pound falling to its now almost 40-year low: “Foreign Secretary Liz Truss is expected to take over at the helm, however, the pound transactions at its lowest possible level since March 2020 suggests that the market is worried about her strategy of cutting taxes to turbocharge the economy.” This was said before the results were announced and the pound fell to its nearly 40-year low.
“There is a good chance that this may backfire and cause inflation to rise much worse.”
In other news, the value of the euro fell below one dollar for the first time in twenty years when it occurred on Monday.
This comes at a time when economies all across Europe are being pummeled by skyrocketing gas and power prices as a result of the conflict in Ukraine as well as a number of other causes.