Inflation rises to 10% as the government is under pressure – how will this impact the pound?

GBP USD Exchange Rate Plunges to Lowest Since September 2020

Data released yesterday confirmed inflation in the UK was once again back above 10%. These are highest levels seen in more than 40 years as the cost-of-living crisis intensifies in the UK.

What does this mean for the pound?

The Bank of England are tasked with keeping inflation under control and their target is 2%. With inflation spiraling out of control the bank has been raising interest rates to combat this. The raising of interest rates generally lends support to the value of the currency (the pound).

At the next monetary policy meeting the markets are expecting the bank to raise interest rates aggressively to try and bring inflation under control. If they do, the pound may find support against euro, dollar, and other currencies. However, if the bank raises interest rates by less than the markets expect then we could see sterling weakness.

Another key thing to consider, is the affect high inflation is having on public spending. As consumers’ pockets are squeezed people will have to cut spending in certain areas of the economy. Last week data confirmed the UK economy shrank in August and if consumers continue to spend less, we could see further negative growth. A recession in the UK would almost certainly spell trouble for the pound.

Political uncertainty can influence exchange rates and the UK has seen plenty of this over the last few weeks. Starting with the sacking of Kwasi Kwarteng, following the disastrous mini budget.

Truss claimed she was a ‘fighter and not a quitter’ during PMQs but yesterday, the recently appointed Suella Braverman resigned for using her personal email for ministerial business. Her resignation letter was critical of the government and suggested that time Truss should also acknowledge her mistakes.

There were reports of other resignations, the Chief Whip Wendy Morton, and her deputy. However, late last night the government confirmed they were still in post.

The crisis for Truss will continue today as the country debates which Truss, we will see next, the fighter or the quitter.

At Lumon, we have a number of different contract options that can help you minimise risk during uncertain times in the market. We can also set rate alerts and monitor the market for you.

If you have any upcoming requirement involving the pound, and wish to speak with a specialist, please feel free to reach out directly on [email protected]