If the financial markets are sending a message to Britain’s new Prime Minister, Liz Truss, it is a worrying one.
Ms Truss, who was elected the next prime minister by Conservative Party members on Monday, faces enormous economic challenges as energy prices soar and the cost of living becomes increasingly unaffordable. As the outlook dims and a recession becomes more likely, the pound is at its lowest since March 2020 and nearing its lowest since 1985 against the dollar.
Elsewhere in Europe, markets started the week on shaky ground after Russian energy giant Gazprom said on Friday it would not resume natural gas flows between Russia and Germany through the Nord Stream 1 pipeline as expected on Saturday. Natural gas prices soared and stocks plummeted.
Last month, the British pound fell 4.5 percent against the US dollar, its worst month in nearly six years, as the economic outlook worsened. Households have been told to expect their energy bills to rise by 80 percent in October and industry groups have warned there could be large-scale shutdowns by companies unable to afford the energy bills. The Bank of England has hiked rates by the most in 27 years, and traders are betting rates would need to rise much more to combat inflation, which has hit 10.1 percent despite forecasts of a recession become more frequent.
The pound was little changed at around $1.15 on Monday when Ms. Truss was announced as the new prime minister with a widely anticipated result. It has been steadily declining for over a year (since hitting $1.42 in June 2021) and is less than 1 percent from its lowest level since 1985. Yields on UK government debt, a measure of the cost of borrowing, have also skyrocketed. The 10-year bond yield approached 3 percent, its highest since early 2014.
Decision not to restart Russian gas flows through Nord Stream 1 Concerns have increased about Europe’s winter energy supply and how much consumption may need to be curtailed to avoid blackouts.
Dutch benchmark natural gas futures rose as much as 35 percent Monday morning and 24 percent late in the morning.
The euro was 0.3 percent weaker against the dollar on Monday, falling to 99 US cents on Monday. It fell below parity for the first time in two decades in mid-July and stayed around that level. The common currency has fallen nearly 13 percent against the dollar this year as an energy crisis loomed and the dollar appreciated as the Federal Reserve sharply hiked interest rates in the United States.
On Monday, the leading German index DAX fell by 2.7 percent and the Euro Stoxx 600 by 1.2 percent. In the UK, the FTSE 100 fell 0.6 percent.
In the United States, stock markets were closed for the Labor Day holiday.