British Pound Plunges, Bonds Plunge After Tax Cut Announcement

The British pound hit its lowest level since July 1, 2020.

Matt Cardy | fake images

The embattled pound sterling fell 2.5% against the dollar on Friday, after the new UK government announced a sweeping economic plan in a bid to boost growth.

Sterling had fallen as low as $1.0975 by 3:35pm London time, extending losses it made after the morning measures were released.

The pound has fallen precipitously against the dollar this year, reaching levels this month not seen since 1985 when it fell to $1,042.

Friday’s measures were heralded by the government as heralding a new era for the UK focused on growth and included a mix of tax cuts and investment incentives for businesses.

Investors also dumped UK bonds amid an expected rise in government debt. Paul Johnson, director of the Institute for Fiscal Studies, said markets seemed “scared” by the scale of the “tax giveaway” and said it represented the highest level of tax cuts in half a century.

UK 2-year government bond yields hit their highest level since October 2007, and 10-year yields hit their highest level since 2010. Yields move inversely to prices.

The 10-year yield was set for its biggest daily rise since 1998, Reuters reported. At 1:45 p.m. it had risen 26 basis points to 3.759%.

UK stock markets also fell, with the FTSE 100 hitting its lowest level since March.

Stocks fall as UK reveals debt-financed tax cut

It comes after the Bank of England said on Thursday that the UK economy was probably already in a recession as it raised interest rates by 50 basis points.

Jane Foley, senior FX strategist at Dutch bank Rabobank, said the market seemed skeptical of the government’s 2.5% growth target even though the measures were “blatantly designed to boost demand”.

“The obvious implication is that BOE rates are likely to be higher for longer than they otherwise would have been. While textbooks suggest higher short-term interest rates should support the currency, GBP has been proving since the spring that this is not always the case.
case,” he said in a note.

With the UK hitting a record debt-to-GDP ratio, the pound is vulnerable to a downward revision if foreign investors are reluctant to finance the deficit, Foley said; and “the markets clearly doubt the ability of this government to manage the debt.”

The UK is at risk of a currency crisis that could see sterling reach parity with the dollar, several analysts have warned.

“We think the UK will find it increasingly difficult to finance this deficit amid a deteriorating economic backdrop – something has to give, and that something will eventually be a much lower exchange rate,” said Vasileios Gkionakis, an analyst at Citi. , in a research note cited by Reuters.

The euro also fell against the dollar on Friday afternoon, falling 1.1% on the day to 97 cents after a statement showed the euro zone Purchasing Managers’ Index fell to 48.2 in September. S&P Global said it meant the bloc was likely to enter a recession.

The dollar has been buoyed this year by stock market volatility and Federal Reserve interest rate hikes.

But the negative reaction to the pound remains clear, with the euro up 1% against the British pound at 0.882.

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