The British pound fell to its lowest level against the US dollar since 1985 before rebounding on Monday. Investors digest the UK government’s plan to stimulate the economy through tax cuts while borrowing more money to spend on programs.
Traders plunged the value of the British pound down 5% on Monday morning, the first trading day after Canada’s equivalent of Finance Minister Kwasi Kwarten announced the government’s plans to boost economic growth this year. Slightly above US$1.03. Year.
Faced with slowing growth and very high inflation, the ruling Conservative Party plans to cut corporate and personal income taxes to their lowest levels in half a century, while subsidizing food and energy prices for consumers. It also plans to borrow more money to do so.
“The Truss administration is going back to the old Reaganomics strategy with massive, unfunded personal and corporate tax cuts that are expected to boost supply-side investment and spur growth,” said Bipan Rai, a foreign exchange analyst at CIBC. is restarting,” he said.
The pound sold heavily on the news as traders expressed doubts about whether the plan would work. The pound has not been so low against the US dollar since February 25, 1985, when it hovered around his $1.05 under Margaret Thatcher’s government.
Earlier losses on Monday were mostly due to trading in Asia. The pound began to recover once trading in Europe began. By afternoon local time in London, the pound was barely positive after widespread speculation that the Bank of England might announce an emergency unscheduled rate hike.
In the end, the pound fell again to around $1.06, with the central bank simply issuing a statement that it would not hesitate to change interest rates as much as necessary.
The seesaw move speaks to how insecure investors are about the UK government’s ability to keep inflation in check without collapsing the already faltering economy.
“The UK has decided the best way to go is to go back to the 1980s on steroids,” Rabobank strategist Michael Every said.
“The market is currently treating the UK as if it were an emerging market, and the point of policy responses and the naivety of thinking that boosting demand, not supply, is the way to deal with supply-side shocks. And they weren’t wrong.”
Further decline likely
Despite Monday’s ups and downs, experts suggest the pound could fall further.
“Relaxing fiscal policy in a period of high inflation [the pound] We’ll have to re-evaluate it lower,” Lai said.
The plunge in the pound raises the possibility that the Bank of England will have to raise interest rates more aggressively than ever to stop the bleeding. Traders expect an unprecedented 125-point rate hike when the Bank of England meets in his early November.
Yields on two-year government bonds (known as gold coins) priced in pounds jumped to a decade-high on Friday before breaking its record on Monday. His 2-year prime in the UK yielded over 4.5% on Monday.
A year ago, the same government debt yielded less than 0.5%.
Prices in pounds are sinking like stone for a number of good reasons, but a strong US dollar certainly won’t help. As is often the case in times of economic uncertainty, the US dollar is rising as foreign investors flock to the perceived safe haven.
Looney is trading at 73 cents on Monday morning, its lowest level since 2020.