Well done to the UK government for putting the country’s interests before the interests of its own party.
Let me explain what has happened in the markets in the last week, and why the UK government had no choice to delay the Chancellor’s Autumn statement.
Last week, on Thursday 3rd November, the UK bank of England raised interest rates by 0.75% to 3%- it did the same on Thursday 22nd September 2022.
The problem.
Largely due to the Ukrainian war the price of oil was rocketing. This was making the pound fall a bit. Inflation was rocketing and is just over 10%.
Now on Thursday 22nd September the Bank of England raised interest rates to try and bring inflation under control. That’s good for the economy- it’s bad for Joe Public because you have to pay more interest.
Why a weak pound is bad for Joe Public
A weak pound against the US dollar is bad.
· A weak pound piles pressure on the costs of goods, which can in turn, push up inflation.
· Items brought from abroad such as petrol, diesel and many food items become more expensive. Something like 1/3rd of your food basket comes from abroad.
· Going abroad is more expensive.
· Investments lessen in value the commonest being pensions. This is why sadly some retirees have had to return to work.
Now let me explain why the government took the action it did
In the mini budget on Friday 23rd September the UK government reduced taxes on bankers bonuses. On that day the pound fell it its lowest level against the US dollar for quite some time. At its weakest £1 was worth $1.02 per pound- the lowest level this century.
The government faced no end of criticism from the opposition.
Since then, the pound rose by $0.01 per week on average since 23rd September for 3 reasons.
· The dollar was weak so foreign investors would get more for their money if they invested in the UK.
· Interest rates had risen so again foreign investors would get more for their money if they invested in the UK.
· The tax on bankers bonuses was reduced so traders like myself would really go for it.
You may want to look at the charts below. Green means a rise, red is a fall.
A rise of 1 cent per week is good.
However, it worked too well. The pound started to rise against the 6 other major currencies: US Dollar, the Canadian dollar, the New Zealand dollar, the Australian dollar, the Japanese Yen and the Euro.
On Friday 14th October the Japanese Yen collapsed and the pound rocketed against the Yen. If left unchecked our exports would be so expensive nobody would buy them. Chancellor Jeremy Hunt had no choice but to reverse the mini budget. The pound was getting too strong too quickly.
The similarity with Captain America the First Avenger
Have you seen Captain America the First Avenger? In Captain America Steve Rogers was 7 stone with polio and asthma being given a super serum and converted into a superman. Steve Rogers was chosen because he had never known health fitness and strength and so he would have respected his powers, never abused them and have compassion for the weak.
At the time of 14th October it was like giving the super serum to the school bully.
The week of Halloween and bonfire night.
Now the Autumn statement was due to take place on Monday 31st October 2022. Let me explain why the government adjourned it for 2 weeks.
On Tuesday 1st and Wednesday 2nd November the US Federal Reserve met to determine their interest rates. As expected the US Federal Reserve raised interest rates to combat their rising inflation. The dollar was up and down like Lord Flasheart’s trousers against the 6 other major currencies.
On Thursday 3rd November the UK Bank of England met again and as expected it raised interest rates by 0.75%. The pound took a real beating against the major currencies but hold that thought.
On Friday 4th November it was non-farm payroll day- the biggest trading day of the month. It’s the day that the US government reveals the number of people who are employed outside the farming sector. The markets went crazy for an hour after the figure was released but as the day went on the UK pound started to rise. My guess is because overseas investors were investing in the UK.
Now this week the US midterm elections take place. The Republicans are expected to do well. I expect the dollar to do well. There is speculation that if the Republicans do well Trump can stand for Speaker. If elected he can put in a motion to impeach President Biden and VP Harris. That motion will be voted on by the Senate which is republican led. If successful Trump returns to the White House. I expect the dollar to really rally.
The UK pound needs stability in the markets and so the UK government rightly delayed the Autumn Statement. I think they should delay it until the new year to give some degree of stability in the markets.
So well done the UK government for putting the country’s interests before the interests of its own party.
The only bad thing is that at the time of writing this is that the UK pound has risen from $1.1295 to $1.15016 i.e. 3 cents in one day and that can be really dangerous!
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