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Sterling markets are right to ignore politics

Marcus Ashworth
Marcus Ashworth7/7/2022 09:17 PM GMT+08  • 3 min read
Sterling markets are right to ignore politics
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UK financial markets have remained indifferent to the soap opera playing out in UK politics in recent days, with Prime Minister Boris Johnson finally announcing his resignation on Wednesday. The only Britons not rivetted by the drama at No. 10 are those who trade British pounds, UK equities and gilts for a living. For them, the economic backdrop remains more important than who leads the government.

Bigger forces at play, including rampant inflation, the cost of living crisis, the super strong dollar and war in Ukraine, transcend domestic infighting as far as sterling markets are concerned. A UK election is still probably about two years away; the chances of big policy changes from whoever succeeds Johnson as Conservative Party leader to become Prime Minister, bar some feelgood tax cuts to appease the party faithful, are remote. Any fiscal stimulus is likely to be offset by further monetary tightening from the Bank of England as consumer prices increase by double digits.

While the pound is certainly weaker versus the dollar this year, that’s true of all major world currencies. The euro, for example, is at a 20-year low and approaching parity to the dollar. Sterling is actually nearer the highs of its post-Brexit referendum vote range against the common currency, so there is little discernable political effect on the UK currency.

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