Pound plummets to record low as UK market ‘under siege’

Pound plummets to record low as UK market ‘under siege’


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13 minutes ago

“The crash of the pound shows that markets are losing confidence in the UK and that its financial strength is under siege.”

“The crash of the pound shows that markets are losing confidence in the UK and that its financial strength is under siege.”

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The pound plummeted by almost 5% to a record low after the UK government promised to push for further tax cuts, gold coins crashed, and fears that the new fiscal policy would lead to inflation and debt surges. .

It was the pound’s biggest intraday drop since March 2020, when investor panic over the then-unfolding Covid-19 pandemic roiled markets around the world. A drop to $1.0350 has raised the chances of the currency parity with the dollar to around 50% this year.

The latest crash was fueled by Prime Minister Kwasi Kwarten’s words on Sunday that there was “more to come” in tax cuts, fueling calls for aggressive rate hikes by the Bank of England, with some analysts We are urging them to take emergency measures as early as this week. It threatens to throw Prime Minister Liz Truss’ government just days ago into chaos as the country grapples with a cost-of-living crisis.

“The plunge in the pound shows markets are losing confidence in the UK and that Britain’s financial strength is under siege,” said Jessica Amir, strategist at Saxo Capital Markets in Sydney. “The pound is just off par and things will get worse from here,” he said.

Some market participants described the pound’s sudden drop early in Asian time as a flash crash, but derivatives suggest traders are bracing for further declines. Options markets now show about a 50% chance that the pound will fall to par with the dollar this year, up from 32% on Friday. Sterling was down 1.4% at $1.0710 as of 8:40 am in London.

The currency plunge began on Friday with the announcement of the government’s “growth plan”. This was the titular budget and the biggest tax cut in half a century. Kwarteng abolished the top level of income tax and reduced the basic tax rate by 1 percentage point. It also rescinded an increase in the National Health Insurance payroll tax that was introduced earlier this year.

On Sunday, he appeared unfazed by the furious reaction that has sent Britain’s wealth plummeting, telling BBC television that he would not comment on market movements, but that there was “more to come” when it comes to tax cuts.

Truss will face a Conservative uprising against her tax cuts if the pound falls to parity with the dollar, The Telegraph reported on Saturday. Meanwhile, some parts of the market are already calling for urgent action from the BOE to stem the tide. A Bank of England spokesman declined to comment on the currency’s depreciation.

British gilts also fell on Monday’s open, with 10-year yields above 4% for the first time since 2010. The rise will dramatically inflate borrowing costs by an extra £400bn (€445bn), according to the Resolution Foundation’s estimate. It is required over the next five years to fund the growth plan.

Hedge funds increased bullish bets on the pound days before the crash, with leveraged investors adding 13,488 net long contracts in the week ending Sept 20, according to Commodity Futures Trading Commission data Did. This is his biggest increase since March.

“The scale of today’s move means the BOE will be forced to act,” said John Bromhead, currency strategist at Australia and New Zealand Banking Group in Sydney. It priced in a 100 basis point hike by the central bank, and “an inter-meeting rate hike is imminent,” he said.

The opposition Labor party, which already boasts a comfortable lead in the polls, is looking to capitalize on a policy chasm opened by the Tories at the annual meeting that started in Liverpool on Sunday. Party leader Kiel Sturmer told the BBC that he would back out of Mr Kwarten’s most high-profile move, namely the elimination of the top 45% income tax on incomes above £150,000.

“There could be a big rate hike out of the cycle,” said Rajeev DeMelo, a portfolio manager at Gama Asset Management in Geneva and short sterling. “It’s about deploying macroguns to protect the currency.

©2022 Bloomberg LP

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