The pound fell to an all-time low against the dollar on Monday, losing 4.7% to $1.035 after British prime minister Kwasi Kwarteng vowed to pursue more tax cuts.
The drop brought the pound to its lowest level since the currency was decimal in 1971. The sharp drop in the pound coming early in the Asian session, when low volume in the pound-dollar pair could exacerbate volatility. At the start of the European session, the British pound stood at $1.06 against the greenback.
The pound also fell as much as 3.7% against the euro on Monday to 1.0787 euros, hitting its lowest level since September 2020. The drop against the common currency reflects recent weakness in the currency. The pound not only reflects the broad strength of the dollar, but also concerns about UK economy.
Kwarteng on Friday £45 billion revealed The debt financing package provided the biggest tax cut in half a century. UK government bonds sold off sharply, with the gold-plated 10-year yield rising 0.27 percentage points to 3.77 percent. The British pound has also weakened to the lowest level since 1985 in response, below $1.09 – the level where it fell on Monday.
Westminster tax cuts come as UK is expected to spend £150 billion to subsidize energy costs for consumers and businesses. Much of this loan is financed by gilts.
Unlike the massive tax cuts of the 1980s, Kwarteng is borrowing tens of billions of pounds to finance its plans, adding to demand at a time when the Bank of England is raising interest rates to control inflation.
Mansoor Mohi-uddin, chief economist at Bank of Singapore, said: “It looks like we are heading for a spiral that we often see in emerging market crises, where key decision-makers Books struggle to reassert credibility.
Mohi-uddin said investor confidence in the pound has been dampened by expectations that the UK’s public debt is currently on an “unsustainable rise” while the country is still running a “financial deficit”. current account”.
“If we continue to see these huge moves in the markets, the Bank of England will have to raise interest rates, perhaps up to 1 percentage point, to try to stabilize the pound.” he added.
Bank of England interest rate hike rose 0.5 percentage points on Thursday, following a third consecutive 0.75 percentage point interest rate hike by the US Federal Reserve a day earlier.
Forex analysts at Wall Street Bank Goldman Sachs.
“With widespread spending unfunded on the fiscal side and monetary policy inadequate to offset inflationary impulses, the currency is likely to continue to weaken.”
Traders and analysts in Asia say low trading volumes in the region are likely to exacerbate downside pressure on the pound.
“It’s unusual to see Asian markets giving an opinion on this, because the region is often the setter rather than the maker,” said Benjamin Shatil, FX strategist at JPMorgan. . “I suspect that we are seeing relatively lower liquidity in these Asian markets play some role here, with fundamentals further exacerbated by liquidity dynamics. there”.
Additional reporting by Adam Samson in New York and Leo Lewis in Tokyo
