Sterling plunges to record low against dollar as tax cuts plans alarms investors

From 1h ago

Introduction: Sterling hits record low after Kwasi Kwarteng pledged more tax cuts

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

International confidence in the UK has been badly hammered by the mini-budget, and the Truss government’s tax-cutting policies, and the pound is paying the price.

Sterling had plunged to a record low against the US dollar in Asia-Pacific trading, extending the losses suffered on Friday, and moving closer to parity.

Investors have been rocked by the bonanza of tax cuts announced in Kwasi Kwarteng’s mini-budget – with the UK chancellor pledging over the weekend to pursue more tax cuts.

The pound plunged nearly 5% at one point to around $1.0327, Reuters data shows, a record low since at least decimalisation in 1971, as belief in the UK’s economic management and assets evaporated.

Even after stumbling back to $1.05 as City traders reach their desks this morning, the currency was down 7% in two sessions.

It could be a volatile day, with fears over a global downturn also hitting the markets.

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Absolute chaos in FX markets

— IGSquawk (@IGSquawk) September 26, 2022

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Naeem Aslam, chief market analyst at Avatrade, has a scathing assessment of the situation:

Sterling is getting absolutely pounded today in this week’s trading, and traders have started things exactly where they left off on Friday.

Sterling looks like an emerging market currency, especially when you look at the price of the British Pound a few months ago and compare it to where it is now.

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The pound is in free fall. It hits a new record low and is quickly heading toward parity with the US dollar. pic.twitter.com/bRjZgY1xoT

— Lisa Abramowicz (@lisaabramowicz1) September 26, 2022

\n","url":"https://twitter.com/lisaabramowicz1/status/1574209056373440512?s=46&t=Yy4UyWvnLmSNkR7nDDvo3w","id":"1574209056373440512","hasMedia":false,"role":"inline","isThirdPartyTracking":false,"source":"Twitter","elementId":"eda7cc4c-288b-448f-8aa2-f75788aee9cc"}}”>

Marc Chandler, chief market strategist at Bannockburn Global Forex, called the currency’s record plunge “incredible”. He believes there is bound to be speculation of an emergency Bank of England meeting and rate hike.

The pound has now slumped by almost 10% so far this month, hit by anxiety over a looming recession, and the surge in borrowing needed to fund Kwarteng’s £45bn giveaway.

Yesterday, Kwarteng told BBC One’s Sunday with Laura Kuenssberg tha Liz Truss plans to radically reshape the UK economy with even more tax cuts and fewer regulations/

“There’s more to come,” Kwasi Kwarteng said, declining to set a limit on how much public debt could be incurred in the process.

Chris Weston, the head of research at the brokerage firm Pepperstone, said the pound was “the whipping boy” of the G10 foreign exchange market, while the UK bond market was “getting smoked”.

Weston told clients:

“Investors are searching out a response from the Bank of England. They’re saying this is not sustainable, when you’ve got deteriorating growth and a twin deficit.”

“The funding requirement needed to pay for the mini-budget means either we need to see far better growth or higher bond yields to incentive capital inflows,” Weston said.

The City is now looking to see whether the Bank of England takes steps to calm the markets.

On Friday afternoon, Deutsche Bank analyst George Saravelos said the BoE should hold a big inter-meeting interest rate hike as early as this week to calm markets and restore credibility….

Here’s the full story:

The agenda

9am BST: German Ifo Business Climate index
1.30pm BST: Chicago Fed National Activity Index on the US economy
2pm BST: ECB president Christine Lagarde appears at the Economic and Monetary Affairs committee of the European Parliament in Brussels

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Shadow chancellor Rachel Reeves says she is incredibly worried about the fall in the pound overnight.

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Reeves, who will address the Labour Party conference today, also pointed out that sterling’s slide puts pressure on the Bank of England to raise interest rates (as explained here).

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⚠️ UK OPPOSITION LABOUR FINANCE SPOKESERSON RACHEL REEVES: THE FALL IN STERLING PUTS PRESSURE ON THE BANK OF ENGLAND TO RAISE INTEREST RATES

– Reuters via https://t.co/ymHY6x3NYD

— PiQ  (@PriapusIQ) September 26, 2022

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Reeves told Times Radio that:

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“I started my career as an economist at the Bank of England and like everyone else I’m incredibly worried about what we’ve seen, both on Friday with market reactions to the chancellor’s so-called mini-budget, and also the reactions overnight,”

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“It also puts more pressure on the Bank of England to increase interest rates.

\n

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The “fire sale” in the pound comes as financial markets continue to voice their displeasure over the government’s fiscal policy plans, says Simon Harvey, head of FX Analysis at Monex Europe.

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Momentum now drives the price action in the pound as the exodus from UK assets persists. The sick irony of this is that the weaker the pound gets, the more expensive the government’s liabilities become.

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This is either through the price of its imported energy bill, which the government is completely exposed to given the energy price cap policy for households, or higher financing costs due to more expensive gilt yields.

\n

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Harvey also believes the Bank of England will need to raise interest rates, possibly “in the early part of this week”.

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GBPUSD continued to get nailed overnight. Now, trading just above 1.05, it’s time for European traders to react and it’s purely a momentum trade at this point. BoE will have to intervene at one point, verbally won’t be enough. pic.twitter.com/V719MLXahD

— Simon Harvey (@_SimonHarvey) September 26, 2022

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The Bank’s next scheduled meeting is in early November, after it lifted rates by half a percentage point last Thursday, to 2.25%.

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Harvey suggests another 50bp hike, at least, might be needed now to ‘turn the tide’.

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The option of a larger hike may be more popular among MPC members this week seeing as Number 11 Downing Street continues to stand by its guns as the Chancellor doubled down on his spending commitment over the weekend when speaking to the Financial Times, stating that there is “more to come”.

\n

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The pound’s drop was driven by “growing concerns about the UK’s policy credibility”, says Alvin Tan of RBC Capital Markets.

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Tan also flags the speculation that the Bank of England might be forced to raise interest rates to strengthen sterling.

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He says:

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GBP/USD tumbled to a record low below 1.04. There is also increasing speculation about an emergency BoE rate hike.

\n

Risk-off sentiment continues to dominate as the S&P 500 Index nears its June low, while crude oil prices have slipped to the lowest levels since the start of the Ukraine war.

\n

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Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

","elementId":"675d9b07-be49-4441-8cae-581539ee0d91"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

International confidence in the UK has been badly hammered by the mini-budget, and the Truss government’s tax-cutting policies, and the pound is paying the price.

","elementId":"7f5a0ffd-9870-4c3f-8d14-73a3e50ec708"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Sterling had plunged to a record low against the US dollar in Asia-Pacific trading, extending the losses suffered on Friday, and moving closer to parity.

","elementId":"99eeecf3-38fc-4325-b62a-56e2e5ed41fd"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Investors have been rocked by the bonanza of tax cuts announced in Kwasi Kwarteng’s mini-budget – with the UK chancellor pledging over the weekend to pursue more tax cuts.

","elementId":"ec2f03a2-c4f4-4a07-b3e4-98490f1da1f1"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

The pound plunged nearly 5% at one point to around $1.0327, Reuters data shows, a record low since at least decimalisation in 1971, as belief in the UK’s economic management and assets evaporated.

","elementId":"c980e3d9-7bed-4050-bf62-e481405c173d"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Even after stumbling back to $1.05 as City traders reach their desks this morning, the currency was down 7% in two sessions.

","elementId":"878194c8-54ba-4300-a991-32d07640419a"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

It could be a volatile day, with fears over a global downturn also hitting the markets.

","elementId":"18d149b9-8538-4c01-aa33-68f7b0659367"},{"_type":"model.dotcomrendering.pageElements.TweetBlockElement","html":"

Absolute chaos in FX markets

— IGSquawk (@IGSquawk) September 26, 2022

Naeem Aslam, chief market analyst at Avatrade, has a scathing assessment of the situation:

","elementId":"cfe79f28-5149-4519-bd76-07987bc438f0"},{"_type":"model.dotcomrendering.pageElements.BlockquoteBlockElement","html":"

\n

Sterling is getting absolutely pounded today in this week’s trading, and traders have started things exactly where they left off on Friday.

\n

Sterling looks like an emerging market currency, especially when you look at the price of the British Pound a few months ago and compare it to where it is now.

\n

","elementId":"f8a696ac-3aac-4ca2-9a99-a0702d596e78"},{"_type":"model.dotcomrendering.pageElements.TweetBlockElement","html":"

The pound is in free fall. It hits a new record low and is quickly heading toward parity with the US dollar. pic.twitter.com/bRjZgY1xoT

— Lisa Abramowicz (@lisaabramowicz1) September 26, 2022

","elementId":"44a7d3a2-3e94-4e4f-a97c-ef892b2ea8e1"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

The pound has now slumped by almost 10% so far this month, hit by anxiety over a looming recession, and the surge in borrowing needed to fund Kwarteng’s £45bn giveaway.

","elementId":"40b8ca1e-c031-4c42-bd92-202364e0d09c"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Yesterday, Kwarteng told BBC One’s Sunday with Laura Kuenssberg tha Liz Truss plans to radically reshape the UK economy with even more tax cuts and fewer regulations/

","elementId":"93ab4321-f187-462d-a6ff-fa7a476cae54"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

“There’s more to come,” Kwasi Kwarteng said, declining to set a limit on how much public debt could be incurred in the process.

","elementId":"6336e798-15e0-4e96-83b7-27803443e131"},{"_type":"model.dotcomrendering.pageElements.RichLinkBlockElement","url":"https://www.theguardian.com/politics/2022/sep/25/kwarteng-uk-economy-must-expect-more-tax-cuts-and-deregulation","text":"Kwarteng: UK economy must expect more tax cuts and deregulation","prefix":"Related: ","role":"thumbnail","elementId":"4f8925b9-071b-467c-aa30-d63c7591edf6"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Chris Weston, the head of research at the brokerage firm Pepperstone, said the pound was “the whipping boy” of the G10 foreign exchange market, while the UK bond market was “getting smoked”.

","elementId":"8127124f-cd2c-408e-809d-36c52663cae4"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Weston told clients:

","elementId":"9fe2c0f3-f111-4464-918b-fc3adbff8fa1"},{"_type":"model.dotcomrendering.pageElements.BlockquoteBlockElement","html":"

\n

“Investors are searching out a response from the Bank of England. They’re saying this is not sustainable, when you’ve got deteriorating growth and a twin deficit.”

\n

“The funding requirement needed to pay for the mini-budget means either we need to see far better growth or higher bond yields to incentive capital inflows,” Weston said.

\n

","elementId":"f501aff4-adbf-4253-8dec-aa22bab74a1b"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

The City is now looking to see whether the Bank of England takes steps to calm the markets.

","elementId":"845c9694-fc9b-4d6e-9e43-a134c3c0c858"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

On Friday afternoon, Deutsche Bank analyst George Saravelos said the BoE should hold a big inter-meeting interest rate hike as early as this week to calm markets and restore credibility….

","elementId":"3be283d0-245c-4116-bf69-74b65253b998"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Here’s the full story:

","elementId":"fcb239db-d97d-4b97-981b-7714492f8260"},{"_type":"model.dotcomrendering.pageElements.RichLinkBlockElement","url":"https://www.theguardian.com/business/2022/sep/25/city-braces-for-more-volatility-mini-budget-rocks-pound-parity-dollar-bond-tax","text":"Pound hits all-time low against dollar after mini-budget rocks markets","prefix":"Related: ","role":"thumbnail","elementId":"c5cabc16-b071-43c3-979c-1cbde7ecad74"},{"_type":"model.dotcomrendering.pageElements.SubheadingBlockElement","html":"

The agenda

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9am BST: German Ifo Business Climate index

1.30pm BST: Chicago Fed National Activity Index on the US economy

2pm BST: ECB president Christine Lagarde appears at the Economic and Monetary Affairs committee of the European Parliament in Brussels

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Key events

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