Pound hits record low

The markets are showing what they think of the "mini-budget" and unfortunately, it's not in Truss they trust, it's the safety of the US dollar. I'm sure many will be pointing out that nearly every major currency has weakened against the dollar, however the numbers show that sterling has suffered more than most. Any minor uplift to household budgets given by the mini-Budget will be more than outweighed by the impacts of Sterling's slide. Unfortunately, this is a classic case of not looking at the whole economic picture when coming up with policy. When the markets give such a damning verdict on policies supposed to be aimed at the economic markets, you know you have really missed the mark.

The Pound has fallen almost as low as the confidence in the current leadership. If this leads to more base rate rises it could be disastrous for all of us. Last week, I called the government short-sighted, but they must have been getting cataract surgery this week to not see this coming. The Dollar equalling the pound is unheard of in my lifetime with its lowest value in nearly 40 years.

The big concern now is that the Bank of England will be forced to respond to the plummeting pound with an emergency rate hike within the next few days. This will likely cause turmoil amongst lenders and borrowers, both of whom are struggling to cope with the pace of change as it is, and potentially put the Bank of England on a collision course with the government and their quest to stimulate the economy. A currency in freefall, the soaring cost of borrowing and a Government and central bank pulling in opposite directions is the stuff of a banana republic.

The UK economy imports more than it exports, and the revenues of the top 100 companies are obtained mainly overseas. That's a double blow. What we import costs more, and revenues are worth less. Investors and savers are stuck. There are good fixed rate deals for savers, but why take them if the rate may be going up again soon? Investors may be highly cautious about investing in the markets when the coming recession hasn't arrived. The government's strategy has sent the pound crashing for good reason. The rest of the world thinks it's a bad idea to cut taxes. The tax cuts are funded by borrowing at a time of increased interest rates and already high debt levels. A weakened pound makes many UK companies a target for takeover.

The Chancellor’s budget has done more worse than good, resulting in an all-time low for the pound against the dollar. The ramifications of this are extraordinary and the UK economy is now officially on red alert. This will now lead to more expensive fuel prices, leading to more expensive everyday goods as transport costs increase, plus more expensive imported goods. If there is an emergency MPC meeting, then another rate rise is almost guaranteed, which will then mean higher mortgage interest rates. The wholesale tax cuts announced last week are decimating confidence in the UK and will almost certainly put more people and businesses in an even more difficult position, which is quite the opposite of the Government's intentions. On the flip side, if someone has money invested in the US markets and wants to sell them now, they are sitting pretty.

Remember that magic money tree that the Tories used to bang on about? Seems that it does actually exist when it means giving tax cuts to your donor chums. I can't actually recall a government more out of touch with the country and after 12 years in charge, this lot are definitely running on empty.

Imports will be more expensive so expect the prices of raw materials such as wheat and crude oil to rise, which will then push inflation higher. But sterling’s weakness also creates winners with the largest gains going to exporters as well as the housing market. Around 70% to 75% of FTSE 100 companies earn higher when they buy more pounds to convert their dollar revenues back into the local currency. This was the case when the FTSE surged 10.4% in March 2017 when the pound was battered 12.8% against the greenback. In addition, the UK real estate market can be more attractive to foreign buyers. Expect wealthy foreign investors from China and the Middle East to flood the UK property market with enquiries for property bargains just like what happened in 2016 when the pound slid to a 31-year low after the Brexit vote. In fact, the country secured 14% of total worldwide commercial real estate investment deals back then because of the Pound's slump.

If Sterling falls further, it's almost certain the Bank of England will be forced to step in and hike the base rate again, probably by at least 0.75% on top of the 0.5% increase last week. Even if the government steadies the ship, I fear we're heading for a house price crash of 20-40% over the next couple of years. There's 1.8m borrowers coming off fixed rate deals next year. They simply won't be able to afford the mortgage payments and will be faced with the stark choice of selling their home or being repossessed.

Currency fluctuations are relative and a weak pound is not all bad news. Businesses exporting UK goods will find it easier as foreign buyers prefer UK quality at more affordable prices. Foreig cash buyers will also push forward their UK property purchases, which will lead to higher prices. We will also see more regular monies coming in through tourism and remittances from emigrants wanting to look after their elderly families. A weak pound also boosts the FTSE 100 as the majority of its earnings comes from overseas via dollars. We therefore advise our clients to ignore these temporary noises and focus on the reality of their own financial plans, which take into account most of these scenarios. As for how the policies will leave us in the future, putting all your eggs in one basket is what we advise everyone against. That's because we have a duty to look after client money plus it's downright dangerous. It's always easier to spend other people's money for short term gains.

It's very worrying seeing the pound hit an all time low against the Dollar and not a great endorsement of the "mini budget" from Chancellor Kwasi Kwarteng. This will make the cost of imports like oil and gas even more expensive, and push inflation even further. It seems like a market over-reaction to me, as the USA is facing may similar economic struggles to the UK. However as the Dollar is the world's biggest reserve currency, it would seem they get a free pass, while all other currencies get hammered.