Sterling Slumps to Record Low; Kwarteng Points to More Tax Cuts

By Peter Nurse

Investing.com - The British pound continued to slump in early European trading Monday, falling to a record low against the soaring U.S. dollar as traders doubted the sustainability of the new U.K. government's economic plan.

GBP/USD slumped as much as 5% to an all-time low of 1.0327 earlier Monday, before stabilizing around 1.0714, 1.7% below the previous session's close.

This weakness followed hefty selling on Friday after new U.K. finance minister Kwasi Kwarteng unveiled the country’s biggest package of tax cuts in 50 years, which would likely have to be funded by the biggest increase in borrowing since 1972 even with the country facing slowing growth and twin deficits.

Kwarteng added in an interview on Sunday that he wants to keep cutting taxes as part of an effort to boost U.K. economic growth, telling the BBC there was "more to come".

“A daunting list of challenges has arisen for sterling-denominated bond investors, and the Treasury’s mini-budget has done little to shore up confidence,” said analysts at ING, in a note. “Widening rate differentials are no consolation for the pound, with FX remaining the main vehicle to price U.K. country risk.”

Further losses for the pound look likely. 

"With broad unfunded spending on the fiscal side unmatched by monetary policy to offset the inflationary impulse, the currency is likely to weaken further," said analysts at Goldman Sachs, in a note. "We are revising our GBP forecasts weaker vs EUR to 0.92, 0.90, 0.88 in 3, 6, and 12 months (vs 0.85, 0.83, and 0.84 previously). We are also downgrading our GBP/USD forecasts for 3, 6, and 12 months ahead to 1.05, 1.08, and 1.19."

Traders are now pricing in a more robust response from the Bank of England after its hike of just 50 basis points last week, with the market now pricing in interest rate increases of at least another 135 basis points by November.

Still, it's debatable how much this will do to support the beleaguered currency.

“The short pound is not only market’s favorite trade for a stagflation proxy but the pound is also facing a confidence issue,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. “We remain cautious on a potential downgrade to the UK’s sovereign rating or outlook.”  

Sterling’s weakness helped the safe-haven U.S. dollar climb to a new two-decade peak against a basket of major peers. 

At 03:05 ET (07:05 GMT), the US Dollar Index, which tracks the greenback against a basket of six other currencies, gained 0.4% to 113.430.

The euro was also hard hit, with EUR/USD trading 0.6% lower to 0.9632, after earlier falling to a fresh 20-year low below 0.96.

The escalation in the Ukraine war, with Russia holding widely-criticized votes aimed at annexing territory it has taken by force, has hit the single currency, along with the uncertainty surrounding the weekend election in Italy which is set to propel a right-wing alliance to power in the Eurozone’s third-largest economy.

USD/JPY rose 0.4% to 143.86, with the yen slipping despite last week’s intervention by Japanese authorities to support the yen for the first time since 1998.

Data showed that Japanese business activity grew slightly in September, but the outlook for the Japanese economy remained pressured by high inflation and a weakening yen.

The risk-sensitive AUD/USD fell 0.6% to 0.6491, and USD/CNY rose 0.5% to 7.1620, with the yuan hitting a fresh two-year low against the dollar despite several measures by the People’s Bank of China to curb further losses in the currency.

Begin trading today! Create an account by completing our form

Privacy Notice

At One Financial Markets we are committed to safeguarding your privacy.

Please see our Privacy Policy for details about what information is collected from you and why it is collected. We do not sell your information or use it other than as described in the Policy.

Please note that it is in our legitimate business interest to send you certain marketing emails from time to time. However, if you would prefer not to receive these you can opt-out by ticking the box below.

Alternatively, you can use the unsubscribe link at the bottom of the Demo account confirmation email or any subsequent emails we send.

By completing the form and downloading the platform you agree with the use of your personal information as detailed in the Policy.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 82.4% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Back to top

Office network
  • London Office
    One Financial Markets 

    1 Finsbury Market
    London
    EC2A 2BN
    United Kingdom


    T:  + 44 ( 0 ) 203 857 2000
    E:  info@ofmarkets.com
  • Dubai Office
    One Financial Markets 
    OT19-39 Central Park Tower
    Dubai International Finance Centre
    Dubai
    United Arab Emirates
     
    T: + 00 971 44 22 888
    E:  info@ofmarkets.com
     

One Financial Markets is the trading name of Axi Financial Services (UK) Ltd, a company registered in England with company number 6050593. Axi Financial Services Ltd is authorised and regulated by the Financial Conduct Authority in the UK (under firm reference number 466201) and the Financial Sector Conduct Authority in South Africa (with FSP number 45784).

The information on this site is not directed at residents of the United States, Belgium, Poland or any particular country outside the UK and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

www.onefinancialmarkets.com is owned and operated by Axi Financial Services (UK) Ltd.

Award winning broker
We have been presented with a number of awards that recognise the quality of our service and dedication to our clients :

Best FSA Regulated Broker
Saudi Money Expo

Best Education Product
Saudi Money Expo

Best Broker - Online Trading
IAIR Awards

Best Institutional Broker
Saudi Money Expo

Best FX Services Broker
CN Forex

Top International
FX Broker 2015

Saudi Money Expo

Broker of the Year
Online Trading – Middle East

IAIR Awards

Best Forex
Customer Service 2018

JFEX Awards

We accept the following payment methods: