Prime Minister Sunak took the reigns as the leader of the UK Parliament after former Prime Minister Liz Truss resigned. Liz Truss will go down in history for two reasons, she was the last Prime Minister to present her credentials to Queen Elizabeth before she passed, and she was the shortest serving leader, resigning after only forty-four days in office. Prime Minister Truss won the Conservative Party’s support after scandals caused former Prime Minister Boris Johnson to resign. One of her first moves was to propose a mini budget for the struggling UK economy, leading to her resignation.

Since taking over the position, Prime Minister Sunak has received a boost from the action in the financial markets, as the pound and UK stock market have moved higher.  

The pound recovers from a thirty-seven-year low

Political instability in the UK after Prime Minister Johnson resigned and Prime Minister Truss’s brief period in office pushed the British currency to its lowest level in nearly four decades in late September 2022. 

The chart highlights the decline to $1.03485, the lowest level in the pound versus the US dollar exchange rate since the 1985 $1.0345 low. The pound stopped short of a new low and trading at parity against the US currency. 

Prime Minister Truss’s resignation and Prime Minister Sunak’s ascent to the highest political office in the United Kingdom caused a new optimism in the US, pushing the pound to over the $1.1370 level against the dollar on November 9. While the pound recovered, it remains at the lowest level in decades against the US dollar. 

The leading UK stocks rallied from the late September low

UK stocks also rallied after the power shift to another UK Conservative Party leader. The iShares MSCI United Kingdom ETF (EWU) recovered from the late September low. 

The chart shows the rally in the EWU ETF from $25.36 on September 28 to the $28.60 level on November 9.

An investment in the UK is a bet on the new Prime Minister

Many factors drive the pound versus the dollar and the path of least resistance of UK stocks. Interest rate differentials tend to drive foreign exchange rates, and the aggressive rate hikes by the US Fed have pushed the US dollar index to the highest level since 2002 over the past months. While the euro currency accounts for 57.6% of the dollar index, the dollar index has an 11.9% exposure to the British pound. The rally in the pound since the late September low likely pushed UK stocks higher. 

Meanwhile, Prime Minister Sunak’s experience at Goldman Sachs, the leading investment bank, appears to have calmed the storm in UK markets. The Prime Minister faces a continuation of issues in the aftermath of Brexit. However, the currency and equity markets have given a short-term thumbs up to the new Prime Minister’s leadership. Time will tell if the recent rallies in the pound and the UK stock market are a honeymoon period or the beginning of a more substantial recovery. The pound remains in a long-term bearish trend, dating back to the November 20078 $2.1161 high, and the UK stock market has also made lower highs and lower lows since the October 2007 high. The pound is at nearly half the value of the 2007 peak, and the EWU ETF was also at almost half the level as the 2007 high on November 8. 

Ukraine continues to loom large for the UK and Europe

The first major war in Europe since WW II remains a clear and present danger for Europe’s economy. Even though the UK left the European Union, the nation separated from the continent by the English Channel remains highly sensitive to Europe’s economy and political woes. Inflation, energy scarcity, and other fallout from the war on Europe’s doorstep will impact the UK economy over the coming months. While the UK is no longer an EU member, geography and the geopolitical landscape present challenges that will continue to drive the path of least resistance of the pound and the UK stock market.

A peaceful solution could ignite a substantial rally in the UK and other European markets, but a continuation of the war will likely take a toll on the economies. As of November 8, the war continued to rage, with a very challenging winter on the horizon. Russia appears determined to use energy as a weapon against “unfriendly” countries supporting Ukraine. Europe depends on Russia for natural gas and other energy supplies. Meanwhile, Russia and Ukraine are significant producers and exporters of the agricultural products that feed Europe and the world. Corn and wheat fields in Ukraine are battlefields, and the Black Sea Ports, a crucial logistical hub, continue to be a warzone in November 2022. 

Levels to watch in the pound versus the US dollar currency relationship

The long-term chart of the pound versus the dollar continues to exhibit a bearish trend. The currency relationship would need to rise above the $1.42472 level, the June 2021 high, to end the fifteen-year bear market in the pound versus the dollar. UK stocks are in the same bearish boat. 

The long-term EWU chart shows that to break the bearish price pattern, the ETF would need to rise above the February 2022 $35.09 high to end its bearish path of least resistance. 

Prime Minister Sunak has his hands full with the war in Ukraine and the lingering impact of Brexit on the UK economy. Time will tell if the market’s initial reaction to his leadership is nothing more than a bear market rally or the beginning of a recovery that will entice investors and traders to return to the UK. The UK has undergone a significant change over the past weeks. Beloved Queen Elizabeth passed away, and King Charles III is now the monarch. The UK Prime Minister position has been passed around the Conservative Party like a hot potato. Markets appreciate stability and reject uncertainty. Prime Minister Sunak’s most important job is to return stability to the UK that will cause faith in its markets to flourish. 

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