September 26, 2022: -On Friday, the embattled British pound decreased 3.5% against the dollar after the new U.K. government announced a radical economic plan to promote growth.
Sterling is dropping as low as $1.084, extending the losses it made after the measures were unveiled in the morning in London.
The British pound has been on a steep fall against the greenback this year, hitting levels this month not seen since 1985 when it comes down to $1.042.
The government billed Friday’s measures as heralding a new era for the U.K. focused on growth and which includes a mix of tax cuts and investment incentives for businesses.
Investors ditched U.K. bonds between a rise in expected government debt. Paul Johnson, director of the Institute for Financial Studies, said markets appeared “spooked” by the “fiscal giveaway” scale and represented the highest tax cuts in half a century.
Yields on 2-year U.K. government bonds reached their highest level since October 2007, and 10-year yields reached their highest level since 2010. Yields move inversely to prices.
Reuters reported that the 10-year yield was set for its most significant daily rise since 1998. At 1:45 p.m., it had increased 26 basis points to 3.759%.
U.K. equity markets also decrease, with the FTSE 100 shooting its lowest since March.
On Thursday, it comes following the Bank of England saying that the U.K. economy was already in a recession as it increased interest rates by 50 basis points.
Jane Foley, a senior F.X. strategist at Dutch bank Rabobank, stated the market appeared skeptical of the government’s 2.5% increase target, though the measures were “unashamedly designed to improve demand.”
“BOE rates will be higher for longer than they would have been on the other side. While textbooks say that higher short-term interest rates should be currency supportive, GDP that demonstrated since the spring that this is not the
case,” she said in a note.
With the U.K. reaching a record debt-to-GDP ratio, the pound is vulnerable to a downward revision if foreign investors are willing to fund the deficit, Foley added, and “markets are doubtful of the ability of this government to look after the debt.”
Several analysts warned that the U.K. risks a currency crisis that could see the sterling reach parity with the dollar.
“We think the U.K. will find it increasingly difficult to finance this deficit amidst such a deteriorating economic backdrop; which has to give, and that eventually be a much lower exchange rate,” says Citi analyst Vasileios Gkionakis in a research note said by Reuters.
