LONDON, Feb 13 — The pound extended gains today as investors bet that the appointment of a new British finance minister would pave the way for a more expansionary budget next month.
Sajid Javid resigned as finance minister in Prime Minister Boris Johnson’s new cabinet after he was asked to replace all his advisers, according to a source close to Javid.
He was replaced by Rishi Sunak, a Johnson loyalist previously second in command to Javid in overseeing public spending.
“There has been an ongoing rift for a while between (Johnson adviser Dominic) Cummings and the Chancellor (finance minister). One of the reasons for the fallout has been reportedly that Javid was much more conservative on fiscal policy,” Jane Foley, an analyst at Rabobank said.
“The implication is that if Cummings is more supportive of the new chancellor then the budget will be more expansionary and then there will be less need for a Bank of England rate cut.”
The pound’s move after Javid’s resignation was muted but it then rose sharply after Sunak was reported as his replacement.
The currency rose as high as US$1.3045 from about US$1.2988, leaving it up more than 0.6 per cent on the day. The pound also extended its rally against the euro, rising as much as 0.7 per cent on the day to 83.270 pence, its highest since Dec. 16.
Some economists – and investors – say more fiscal spending in Britain, where borrowing costs remain near historical lows, is needed to boost an economy struggling to grow by much.
Growth in the UK showed no change in the fourth quarter on Tuesday, despite market expectations that it would be slower, and today a closely watched survey showed house prices rose at their fastest pace in nearly three years.
But expectations of more fiscal stimulus could mean money markets further pare back the likelihood of a Bank of England interest rate cut; they already do not price in a full 25 basis-point cut until the end of 2021. The BoE voted against a rate cut last month.
But as the UK embarks on a lengthy and complex negotiation with the remaining 27 European Union countries, the pound could be in for a rocky ride.
“The subjects are diverse, the positions far opposed and time in short supply. So anyone hoping that sterling could be out of the woods might be bitterly disappointed,” said Antje Praefcke, an analyst at Commerzbank, adding she expects higher sterling volatility once negotiations officially start in March.
The change in UK finance minister today was part of Johnson’s cabinet reshuffle. He is appointing a team he hopes will deliver his vision for Britain beyond its exit from the EU and heal divisions both in his Conservative Party and the country. — Reuters