Currency experts are divided on whether the UK government will row back further on the proposed tax cuts announced in September that weakened an already vulnerable pound.
José Torres, Senior Economist at Interactive Brokers reckons the pound will stabilise as fiscal authorities pare back their accommodative budgetary plans and accept weaker economic conditions, and ForexLive Chief Currency Analyst, Adam Button, says there will be fresh urgency to raise revenues in the 23rd November fiscal update.
In contrast, Ipek Ozkardeskaya, Senior Analyst at Swissquote suggests that there is more chance of the government going bust before the end of the first quarter of next year than giving up on its promised reforms. “The pound will likely go down further from here before it gets better,” she says.
It would appear that these policies are here to stay for now, although another wave of excessive volatility in the markets could see the pressure become unbearable according to Oanda Senior Market Analyst, Craig Erlam.
“Tax cuts may be coming, but so are much higher borrowing costs which will not be music to the ears of anyone with a floating rate mortgage or the need to re-mortgage in the next 12 months,” he adds. “Rate rises may help steady the pound in the near term, but the economic outlook remains bleak and that may well take its toll regardless of what the Bank of England does.”
Axel Rudolph, Senior Financial Analyst at IG Group reckons further backtracking on economic policy is unlikely because the government would lose face and because the Prime Minister and the Chancellor of the Exchequer are relying on the Bank of England to do everything in its power to stabilise financial markets in order to avert a full blown currency crisis.
“They rolled back on the plan to scrap the 45% tax bracket, but the other changes are likely to stay put as long as this government is in power,” agrees Saxo’s Head of FX Strategy, John Hardy. “Longer-term restoration of confidence in the pound will likely require a more responsible message on fiscal prudence.”
It is not just the dollar that the UK currency has been struggling against – the pound has recently touched a two year low against the euro. However, it is its struggles against the greenback that have caused the greatest difficulty for UK corporates.
Max Sheridan is Managing Director of Algeos, a Liverpool-based manufacturer and distributor of medical materials, technology and consumables to the podiatry, physiotherapy, footwear and orthopaedic markets. The company sells into more than 50 markets in both euro and dollar as well as being a key supplier to the NHS.
“We currently purchase more in dollars than we sell, but our long-term objective is to increase export sales and reduce our exposure to GBP/USD volatility,” he explains. “Exports account for about 15% of our business currently and we have recently secured a contract in the Middle East worth in the region of one million dollars.”
The company’s ability to pass on increased costs is limited since much of its business is done with the NHS, which is itself under funding pressure. However, it is actively exploring options for manufacturing more of its products in the UK.
“We are also trying to source more materials locally – or at least in Europe rather than further afield – which reduces the impact of sterling volatility since the euro has also fallen against the dollar,” says Sheridan. “The weak pound is adding to the cost of purchasing products and raw materials, which has already risen as a result of the pandemic, the energy crisis, and raw materials shortages.”
