Markets hail Rishi Sunak as PM but warn honesty needed now

Rishi Sunak announced as the new Prime Minister

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Currency markets will breathe a sigh of relief at the appointment of Rishi Sunak as Britain’s next prime minister, but it only signals one less nail in the coffin for the UK economy, a currency expert has said. On Mr Sunak’s win, Patrick Reid, trading mentor and co-founder of FX consultancy The Adamis Principle, told Express.co.uk: “Will sterling rally? Not necessarily. It’s more of a sigh of relief, one less nail in the coffin. The structural issues [in the UK’s economy] have not changed. The markets, whilst they are breathing a sigh of relief, they want more reassurance and a plan.”

He continued: “Yes, short term, sterling is probably not going to go lower, but what next? No one knows. How convincing will he be and what’s his plan? How is he going to make changes after all credibility in the UK Government has basically been battered?”

He cautioned Mr Sunak, who had warned Liz Truss of the impact of making tax cuts during a period of high inflation, against an “I told you so” approach as he steps into office.

Mr Reid said: “My inkling is he won’t say ‘I told you so’, but look forward. He needs to unite the party and start a fresh sheet. If he does that and cxomes up with pragmatic action points to get the economy and credibility back on track, there will be a lift on sterling and risk.”

The currency expert identified low earnings due to inflation, lacklustre GDP growth and worsening sentiment as the main structural challenges of the economy. The Bank of England is also forecasting four to five quarters of negative growth.

He said: “All that was prevalent before the mini budget. We’ve got all of that and a huge lack of credibility in the fiscal trajectory of the Government.

“The best hope [for the economy] was in fiscal credibility and that has gone – cutting tax on borrowed money doesn’t work, having a disregard for markets doesn’t work.”

Mr Reid warned the UK’s economic situation is in danger of putting the Tories in an existential crisis. He said: “Voters have memories.”

On Mr Sunak’s prospects, he said: “He has something that will be a really good start which is honesty. The markets like that.”

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Mr Reid explained what the UK has seen since Ms Truss’s mini budget is markets getting their own back and punishing the Government for its complete disregard.

He added: “The fresh sheet is someone who recognises the markets. It would be a very good start with a large dose of honesty and practical steps, welcoming the OBR report and coming up with a fiscal plan that works and makes sense and manages voters’ expectations. [The Government needs to say] we got it wrong, now we can get it right. That’s what I want to hear.”

Sterling strengthened on Monday, finding short term relief from the likelihood Mr Sunak would become Britain’s next prime minister after Boris Johnson quit the race.

The pound was an outlier among major currencies as most others weakened against the US dollar. It rose as far as $1.1402 in Asian trading before paring gains to hold just inside positive territory at $1.1323.

Sterling’s moves against the euro were sharper with the common currency falling 0.5 percent to 86.84 pence.

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In a statement posted on Twitter, Ms Mordaunt said: “This decision is an historic one and shows, once again, the diversity and talent of our party.

“Rishi has my full support. I am proud of the campaign we ran and grateful to all those, across all sides of our party, who gave me their backing.

“We all owe it to the country, to each other and to Rishi to unite and work together for the good of the nation. There is much work to be done.”

Elected for the first time to parliament in 2015, Mr Sunak became Britain’s youngest prime minister in more than 200 years today, tasked with steering the country through an economic crisis and mounting anger among some voters grappling with a cost-of-living crisis and increased mortgage rates.

One of the wealthiest politicians in Westminster, Mr Sunak enters Downing Street facing a need to make deep public spending cuts to stem a fiscal crisis, as well as tackling the cost-of-living crunch, a winter of strikes and Russia’s war in Ukraine.

His backers say he is a safe pair of hands who can restore Britain’s credibility with investors who sold the country’s bonds and sterling after Ms Truss’s mini budget offered tax cuts with little on how to fund them.

The pound and UK Government bond prices jumped briefly on news Mr Sunak was the only remaining candidate, but swiftly returned to their previous levels.

To balance a budget shortfall made worse by rising borrowing costs, the next PM will most probably have to oversee spending cuts and tax rises. A fiscal statement addressing this is due on October 31.

In a statement released on Sunday announcing his candidacy, Mr Sunak said the country faced a “profound economic crisis”.

When he criticised Ms Truss’s tax-cutting agenda, Mr Sunak said he would instead only cut taxes once inflation had been brought under control. At the time he outlined a plan to cut income tax from 20 percent to 16 percent by 2029.

Mr Sunak has backed the independence of the Bank of England and stressed the importance of Government policy working alongside the central bank to tame inflation, not making it worse.

Between February 2020 and July 2022, he set the UK on course for its biggest tax burden since the 1950s. He also set out higher public spending, but simultaneously promised more discipline and to cut waste.

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