After more than a month of seemingly endless hustings and vague policy discussions, Liz Truss has finally been announced as the Conservative Party leader (and de facto PM) after carrying 57% of the membership’s vote.
While this may have at least created a little more stability in the UK economy, the markets appear to have reacted badly to the appointment. To this end, sterling fell to 1.1407 against the USD during afternoon trading in London, with this level having not been observed in 37 years.
But what does the ascension of Truss really mean for the economy, and how should forex traders react? Let’s find out.
What Concerns Surround Truss?
Of course, the appointment of Truss comes at a time of huge economic tumult and uncertainty, with inflation having recently peaked above 10% and set to reach 18.6% in January.
This is exacerbating a huge cost-of-living crisis in the UK, while the wider supply chain issues being caused by the war in Ukraine, Brexit and the coronavirus fallout are also impacting the supply and price of essential goods.
Truss has immediately moved to ease the crisis by scrapping the proposed energy price cap hike and capping household bills at £2,500 per annum for a period of two years. According to the new Prime Minister’s costs, this will trigger average savings of £1,000 per household, while the policy enabled Truss to avoid imposing a windfall tax on energy giants.
This is a major issue for the policy, as an ideological unwillingness to tax the unexpected profits of energy firms and her fundamental lack of costings has created more questions than answers in the immediate aftermath.
For example, it’s feared that the government’s energy price cap will be paid for by either alternative spending cuts or increased public borrowing. Either way, the long-term cost is likely to be passed onto households, further encumbering them when the two-year grace period ends.
This also taps into wider market concerns about Truss’s grasp of economic policy, with the underlying fear being that mistakes could deepen the UK’s economic issues and lead to further sterling weakness over time.
More specifically, the new PM’s repackaged notion of ‘trickle-down economics’ is primarily focused on slashing corporation tax and increasing investment, in the hope that this will inspire increased consumer spending and economic growth over time.
However, the plans are inherently vague and lacking in detail, while the failure to implement targeted tax cuts and deliver financial savings directly to households could see poorer citizens become even less well off while inflation soars higher.
Obviously, this is creating angst and uncertainty in the financial markets, and Truss has so far been unable to assuage such nagging concerns.
How Can Forex Traders React?
With Truss also planning to adjust the Bank of England’s (BoE’s) mandate and change the NI protocol that had previously been agreed in Boris Johnson’s Brexit deal, it’s little wonder that forex and other traders are approaching their trades with caution.
Certainly, mostforex traders will need to adopt an increasingly cautious and risk-averse approach in the current market, while hedging against the pound as it continues to fall against the dollar and the Euro.
The increased volatility in the market also requires you to pay close attention to your positions and utilise stop losses wisely, as you look to minimise losses and make the most of your capital.
This can help you to avoid instances where your margin levels falls below a specific percentage, which can trigger a forex stop out and see all of your positions closed automatically by your broker of choice.
For those of you who want to leverage the market’s movements to achieve a profit, the key is to accurately predict upcoming monetary policies and trade these before key economic data releases.
For example, with inflation set to rise for an indefinite period of time, it’s likely that central banks (including the BoE) will retain contractionary policies such as hiking interest rates.
This will increase national currency values in some instances, creating short-term growth that may offer a small window of opportunity in which to profit.
The key is to have a clearly-defined outlook and strategy, while monitoring the latest economic trends and monetary policies and executing your trades before specific announcements are made.
This way, you can profit or consolidate your position regardless of how you approach the market, and optimise your returns in challenging economic times.
