Written by: Farah Mourad, Senior Market Analyst of XTB MENA
Financial markets in the UK have reacted positively to the nomination of the new prime minister. The FTSE 100 has effectively reversed course and the pound recorded gains against the dollar and the euro.
Traders expect Liz Truss to boost the UK economy and tackle the current energy crisis and high inflation that impact businesses and households.
Truss has promised plans to resolve these issues. Yet her plan to freeze energy prices for households would cost 130 billion GBP over 18 months and will include setting a fixed price for households and the government compensating energy suppliers for the difference. While this means a massive increase in fiscal spending, what should be GBP-negative, it also gives a chance to avert a major energy crisis that would surely push the UK into recession.
The stock market could extend its gains if the prime minister is able to deliver on her promises. Lower energy bills could help improve industrial activity and free up more spending capacity which could boost retailers among others.
A more dynamic environment and rising interest rates could also bolster the banking sector. Traders will be observing the Bank of England’s decision next week in this regard.
At the same time, the energy sector was under pressure due to the uncertainty around oil and natural gas markets. The former saw OPEC+’s decision to cut crude production amid declining global economic activity and demand. The latter could record high volatility with Russia cutting off supplies to continental Europe.
But Thanks to the positive atmosphere, the pound might witness buyers on the mid terms , if we overcome the energy crisis, in particular against the euro. The latter is seeing downward pressure as the confrontation with Russia continues to damage the European economy.