Sterling Slides after Recovering from Multi-Year Low
On Thursday, Sterling GBPUSD fell by about one percent after British Prime Minister Liz Truss defended economic plans that have triggered chaos in the country’s markets.
The pound sterling has “taken a beating” recently, falling to US$1.04, its lowest level since 1985, on the back of an “ambitious” mini budget announced by the UK government that includes tax cuts and support measures to help offset rising energy prices, Desjardins noted on Thursday.
In a statement, Truss said big tax cuts were the right path for Britain and refused to consider reversing the so-called “mini budget” laid out last week.
The pound was last down 0.88% to $1.0791 after hitting a session low of $1.0764 earlier. The euro EURGBP was up 0.18% against sterling at 89.54 pence.
Sterling crashed to a record low against the dollar of $1.0327 on Monday after new finance minister Kwasi Kwarteng unveiled plans to slash taxes, particularly for the rich, and jack up borrowing.
The mini budget also wreaked havoc in the UK government bond market, forcing the Bank of England to intervene on Wednesday.
The BoE said it would buy around 65 billion pounds of long-dated government bonds after seeing “dysfunction” in the market.
Sterling bounced on Wednesday to close at $1.0877 as investors digested the BoE’s plans.
However, it resumed its long-running slide on Thursday as Truss came out to defend her government’s policies.
“We are facing difficult economic times,” she said on local BBC radio. “I don’t deny this. This is a global problem. But what is absolutely right is the UK government has stepped in and acted at this difficult time.”
Jonas Goltermann, senior markets economist at consultancy Capital Economics, said both dollar strength and fears about the British economy were hitting the pound on Thursday.
“I don’t think (the BoE’s intervention) is going to be a long-term boost for sterling, although it might prevent an extreme downturn,” he said. READ:Nigeria, 33 African Countries Receive $18 Billion from IMF
Goltermann said further falls in sterling are probable. He said the BoE is likely to disappoint traders, who are expecting it to hike interest rates to 6% by spring next year from 2.25% currently.
However, Desjardins also noted, investors are concerned about the impact on demand and inflation, and that the government will have to borrow heavily to fund the plan.
Desjardins said: “The Bank of England had to intervene to stabilize the UK bond market, but that does not change the need to work harder in its fight against inflation, which could exacerbate the economic downturn and keep the pound weak.”
Desjardins noted the euro is under pressure too, trading at US$0.96, its lowest level since 2002. It said Eurozone economic indicators for the coming quarters make for “depressing reading”.
And in the wake of the far-right coalition’s victory in the Italian elections, it added we may see increased political and financial tension fuelled by resistance to the restrictions imposed by the European Union and the European Central Bank.
Interest rate spreads on Italian bonds haven’t widened too much yet, but the future is more uncertain, it added.
# Sterling Slides after Recovering from Multi-Year Low#