Ahead of the Conservative party conference next month, the Prime Minister has pursued a cabinet reshuffle. Whilst Boris Johnson has maintained strong support amongst his own party, divisions within his cabinet have been evident amidst rising Covid-19 cases and a taxation hike. There were several changes within major offices of state. Liz Truss moves from Minister of International Trade to Foreign Secretary. Outgoing Foreign Minister Dominic Raab moves back to Secretary of State for Justice. The move so far at the public level has been peaceful with the former foreign Secretary wary of his own unpopularity given his role in the Afghan crisis and the role of his ministry during his tenure. Any major risk to GBP so far from this particular adjustment has therefore been largely contained. Markets will however continue to keep a close eye on those pending trade deals the State Department for International Trade was working on. The role now undertaken by Anne-Marie Trevelyan will therefore be scrutinised by markets and the public alike in the coming weeks.
Another casualty of the cabinet reshuffle fell upon Gavin Williamson MP who was replaced by Nadhim Zahawi as education secretary. Another troubled and vulnerable post under this government, the Prime Minister was quick to implement a change of leadership. The Conservative party chairman yesterday warned of further hirings and firings throughout the party. Political risk, perhaps with the exception of UK-EU tensions expected to build as this month progresses, is towards its lowest point in several years. Whilst that might lead to defensive de-risking should conditions change, for now it has allowed GBP to remain well bid.
Yesterday, inflation data was read and showed the price level within the UK economy running hot, above previous expectations. The money market was already pricing in rate hike expectations faster than the Bank of England. Thanks to yesterday’s reading that showed August’s annualised inflation level at a whopping 3.2% (versus a previous 2% and forecasted 2.9%), markets are pacing even further ahead. This reading encouraged further speculation of BoE rate hikes, now comfortably pricing in two 25-basis-point hikes in 2022. The first hike is now being revised even earlier towards February next year. Whilst markets may well be disappointed by the Bank of England’s actual rate setting path, the shift has attracted further attention to the UK Pound. The monetary policy committee meeting next week will now attract even more scrutiny with more policy makers expected to join the call for an immediate reduction to the asset purchase program.
Discussion and Analysis by Charles Porter