Why is the pound the best performing currency?

The likely change from a floundering Conservative government to a new Labour Party leadership would likely result in increased economic optimism and a stronger pound. In the event this strength has occurred earlier than expected because the election, which was widely expected to be held around now, actually took place in July. That’s given the pound even more time to rally.

However, it has also given the new Labour government less time to prepare for office, and there may be signs that this is starting to impair both economic optimism and the pound’s performance. The new government needs to wrest the initiative back or else sterling’s gains could be eroded before the end of the year.

What are the signs that Labour may have been caught on the hop by the early election call for July 4^th? One of these is the relatively long period of time (nearly three months) between the election win and the first budget. Usually, new governments get on with setting out their fiscal stall within the first month, or two. This ‘delay’ has allowed unhelpful speculation about the contents of the budget to fester; helped, it must be said, by government warnings that the budget will be very tough.

As a result, whatever optimism there seemed to be about the economy when Labour won the election has been destroyed by budget anxiety. Worse than this is the growing impression that Labour is in turmoil about the budget itself. This is not just down to the alleged GBP22bn ‘black hole’ left in the budget by a departing Conservative government that was economical with the truth about the fiscal finances, but also caused by the fact that a number of alleged Labour plans to raise revenue have been found wanting.

For instance, Labour’s revenue projections from levying increased taxes on those with high levels of wealth are seemingly being disputed by the Treasury on the basis that such taxes can drive potential taxpayers offshore, and so deplete revenues. The fact that Labour ruled out tax increases in the areas that generate significant revenue, like income tax, corporation tax and VAT, appears to have hamstrung Chancellor Reeves. And, at the same time, of course, the new chancellor is trying to Gerrymander the government’s debt calculation down so that it becomes a less onerous constraint on fiscal aid for the economy, particularly when it comes to public sector investment.

Steve Barrow, Head of Standard Bank G10 Strategy still believes that the risk of any sort of repeat of the September 2022 mini-budget fiasco, when former chancellor Kwasi Kwarteng blew up the gilt market and the pound, is very low. But it is not zero. And it is still very possible that confidence in the new government goes downhill faster than it seems to be doing at the moment. So, even if the pound does not collapse in some sort of September 2022 repeat, there is still the risk that those sterling bulls that have stuck with the pound this year jump ship and, at least, produce a decent enough fall in the pound to push the ‘best G10 currency of 2024’ crown off the pound’s head. All of this could happen.

However, Steve Barrow thinks it won’t. Instead, he believes that the new government is more likely to pull things around. It won’t be easy and it won’t be quick. Missteps are not untypical of new governments, especially those that have not tasted power for some fourteen years, as is the case with Labour. But he believes that the new government will turn things around and, importantly, prove better at economic management than the prior Conservative government that got so hung up on one issue – immigration – that it is now in danger of becoming the sort of one-policy marginal party that finds it difficult, if not impossible to get into power.