GBP (£) crash?
The British Pound is close to parity with the USD
Source: Google Finance
As of writing, the British Pound is close to parity to the USD and hits an all-time low against the dollar. As seen above, we can see the ‘crash’ of the £ as it has depreciated in strength as compared to the USD. But why? What are the reasons for the GBP depreciation and what does the future hold for the GBP?
Last year we saw ‘meme-stocks’ , such as GameStop, and the cryptocurrency frenzy. This year seems like the year for currencies to catch the headline news. My previous article looked at the moment at which the EUR (€) was weaker than the USD, (Link to the article.) The El Salvador President, Nayib Bukele, even took a dig at the UK on Twitter after his was criticised for being the first country to have Bitcoin as a country tender.1 Now we are faced with the almighty British Pound facing a fairly similar fate of its European neighbour. What are the reasons causing the Pound to ‘lose’ its value against the USD though?
The depreciation of the GBP could be directly traced to the mini-budget introduced by the newly-elected Chancellor of the Exchequer, Kwasi Kwarteng. He was recently elected by the new Conservative leader, Liz Truss, who has replaced Boris Johnson as the PM and won majority vote over former Chancellor, Rishi Sunak.
Source: The Guardian Mail2
Included in Kwasi’s mini-budget were some tax cuts. These tax cuts include reducing the basic rate of income tax from 20% to 19% and scrapping Sunak’s 1.25% rise National Insurance rate from the 6th of November.
A former Conservative Member of Scottish Parliament (MSP) was very critical of Kwasi’s mini-budget. 3
A conservative would grow the economy first; a conservative would tackle the deficit first; a conservative would get public spending under control first and, only then, only once growth has returned to the economy, would a conservative cut tax.
Evidently, the markets agree.
- Professor Adam Tomkins of the University of Glasgow
But what was the reasoning behind Kwasi’s tax cut? This is where the indirect reason for the £ comes into play. Previously on my World War 3 on the way? (Pt. 1) article, I discussed the ‘domino effect’. The domino effect is Russia’s invasion of Ukraine, which has prompted the Chancellor to implement tax cuts in order to allow British households to save £330 per year to assist them with the surging energy bills. These energy bills are the cause of reduced energy supply due to the dependency of Russian natural gas, which has been subject of sanctions from the West.
What does the future hold of the GBP though? If you currently follow finance meme pages on social media, you will see things like, “it’s called soccer now” and “American bankers enjoying their bonuses on a vacation in England” - a clear mockery to the £ depreciation against the $. The Bank of England (BoE) has launched an emergency bond-buying programme to stabilise the exchange rate4 and Kwasi Kwarteng held a meeting with top US bank executives on Wednesday.5
Little is known about the future as always but I can damn say that the finance industry continues to prove to be as interesting as watching The Wolf of Wall Street. Perhaps that is why I love finance.
https://www.independent.co.uk/tech/pound-crash-price-bitcoin-el-salvador-b2176043.html
https://www.theguardian.com/business/2022/sep/25/city-braces-for-more-volatility-mini-budget-rocks-pound-parity-dollar-bond-tax
https://uk.finance.yahoo.com/news/liz-truss-tax-plans-profoundly-105243915.html
https://www.ft.com/content/756e81d1-b2a6-4580-9054-206386353c4e
https://uk.finance.yahoo.com/news/liz-truss-tax-plans-profoundly-105243915.html
Kind regards,
Nqobani Ndebele
Disclaimer: I am not qualified to give financial and/or investment advice. These are my personal opinions and remember every time you invest, your capital is at risk.