After a very volatile week- Sterling has managed to regain ground against most majors and has returned to same levels it was trading at prior to the Chancellor’s speech. This move must not be mistaken with the market now thinking the Chancellor’s plan is a good one, the Bank of England has had to step in and resume buying GILTs to support the Government’s spending requirements and to stabilize the market. This move is not great seeing as though the BoE is trying to bring down inflation, restarting Quantitative Easing as the exact opposite effect, and now means we will have higher inflation for longer. The markets are now expecting at least 200bps of interest rate hikes from the Bank of England by December, which would bring the UK base rate to 4.25% and the majority of new mortgage rates to around 6%.

I personally do not believe that because Sterling has regained back strength over the last week that we are through the bad times- the reality of the situation is there are a large number of Black Swan events that could still happen that could move Sterling in a big way, and we should be aware of them and how they could affect the market- please see the below from Vanda Research;

  • 35 Tory MP’s vote down parts of the mini-budget (Positive for Sterling).
  • GBP “Flash Crash” prompts emergency BoE rate hike (Initial Sterling weakness leading to Sterling strength)
  • The noise around a second Scottish independence vote picks up (Sterling weakness)
  • Truss/Kwarteng ousted & new caretaker PM put in place (Sterling strength)
  • UK sovereign credit rating gets downgraded (Sterling weakness)
  • Sharp rise in UK redundancies, defaults and company insolvencies (Sterling weakness)
  • Housing market crash or some other UK liquidity crunch (Sterling weakness)

The above are some extreme cases of what could happen and make Sterling move, but some of them do not seem so farfetched to me- so if you are in the process of planning your upcoming payments for this quarter, then please don’t hesitate to contact me.