Since the installation of Boris Johnson as the UK’s latest Prime Minister sterling has faced significant selling pressure, based on fears that Johnson could take the UK out of the European Union without any form of deal. Since Johnson assumed office a week ago, sterling has fallen by more than 3%. This is a precipitous decline and the mass media have begun to talk about a crisis for the currency. The fact that Johnson had on Tuesday this week a supposedly “tense” telephone conversation with the Irish Prime Minister, Leo Varadkar, in which the latter would not budge on the deal brokered by Theresa May, has led to fears that the UK will leave the EU without a deal, although the deadline of 31 October is still weeks away. Nevertheless, sterling volatility has risen and has taken the currency to its lowest level in the past two years. Many investors believe that a no-deal Brexit would send shockwaves throughout the world and tip Britain’s economy into a recession while weakening London’s position as the pre-eminent international financial centre.
The relentless selling pressure that we have seen on sterling could drive up the cost of living for consumers while making imported goods more expensive and ultimately driving up inflation. After the country’s Brexit decision in 2016, inflation rose to its highest level in over five years, impacting household budgets and reducing retail spending. If the currency remains depressed at these low levels, British consumers face a tough time.. On the other hands, a lower pound will help the UK exporting industry, for example, the tourism industry could benefit from more people visiting the country. Manufacturers could suffer, as many need to import components in order to export their own goods. In normal circumstances, the Bank of England would raise interest rates to help control inflation but unfortunately with the currently global economic uncertainty and a no-deal Brexit on cards, Mark Carney, the BoE’s Governor, has very little room to act.
With sterling falling sharply, Gold denominated in this currency has been the biggest winner, rising over 18% since the end of April 2019. The gold price on 30 July 2019 rose to a new all-time high, of more than £1,175 per troy ounce, more than £14/oz or about 1.3% over the previous day. The previous record was more than £1,160, in September 2011.
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