Sterling rebounds after Truss becomes PM but remains under pressure

(Alliance News) - Sterling was responding well to Liz Truss winning the Conservative leadership vote, with the MP from South West Norfolk unveiling an emergency support package to help consumers handle soaring energy bills.

Truss won the contest to succeed Boris Johnson as Tory leader on Monday and will address the nation from Downing Street later Tuesday as prime minister of the UK.

Following her victory over Rishi Sunak, the new party leader will fly to Balmoral on Tuesday where she will be formally invited by the Queen to form a government.

The headline grabbing news following her victory was a plan to help customers handle rising energy bills.

Sterling sunk to a 37-year low against the buck on Monday, AJ Bell's Russ Mould noted, but bounced back after Truss's announcement.

Sterling was quoted at USD1.1601 in mid-morning trade on Tuesday, up sharply from USD1.1507 at the London equities close on Monday.

Against the euro, the pound rose to EUR1.1650 compared to EUR1.1586 on Monday afternoon.

"Reports so far suggest energy providers will be able to use government-backed loans to subsidise bills, meaning there could be some near-term relief on energy costs for consumers and businesses. While not expected to be confirmed until Thursday, the messages clearly being fed in from Liz Truss' team do help to remove some uncertainty and that has translated into a stronger day for UK stocks," Mould added.

The Daily Telegraph reported that Truss is considering a scheme – costing tens of billions of pounds – to freeze bills until the next general election in 2024.

Details could be set out as early as Thursday as the new administration seeks to reassure worried voters following a summer of political paralysis.

Oanda's Craig Erlam said the move could certainly be considered "bold".

"The question is what impact it will have on inflation and gas demand. This will be a core part of what will need to be a much greater package to shield the economy from the grim forecasts we've seen in recent weeks," he added.

Despite Tuesday's climb higher, the pound has been in a steady decline in 2022, having started the year around USD1.3525.

Berenberg economist Holger Schmieding said Truss's would make a "major difference" to inflation.

"As a first guess: If household energy bills remain constant instead of rising in October and again in January, UK inflation could be about 3 percentage points lower in the fourth quarter of 2022 and some 4 percentage points lower in the first quarter of 2023 than otherwise. On its own, that could take our forecasts for UK inflation from 12.8% year on year to about 10% for the fourth quarter and from 13.3% to about 9.5% for the first quarter," he said.

"So far, the UK has offered less support to households than most other European countries. If Truss goes ahead with the reported idea, the UK would go super-European, intervening more than many EU governments. According to some reports, the cap - or a staggered very modest increase in average energy bills - may apply for two years, that is until after the 2024 election."

Fawad Razaqzada, market analyst at City Index and FOREX.com, feel the only way is up from the UK economy, which should pull sterling along with it.

"Will traders push the cable over the edge in the next few days? Given how far it has already fallen, I wouldn’t rule anything anymore. But rates are significantly 'oversold' so a bit of a consolidation should not come as surprise," he added.

By Paul McGowan; [email protected]

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