- The UK’s global image could be severely damaged as the Pound tumbles.
- All focus is on the BoE’s response to the falling pound.
- Truss’s team is convinced their policies will promote faster economic development.
After falling to record lows, the British pound (6B) futures is getting closer to parity with the US dollar. Whether or not prices reach the symbolic threshold, investors are convinced that the new government has severely damaged the UK’s standing with markets. It may require more than just emergency interest rate increases to restore trust.
The pound, the most obvious indicator of how investors view the UK, fell to as low as $1.0327 on Monday, a drop of 8% from when UK Finance Minister Kwasi Kwarteng announced a “mini-budget” on Friday.
By Monday morning, experts urged the Bank of England to raise interest rates to arrest the damage after UK government bond prices collapsed and sterling fell against various currencies.
Markets are alarmed at how fast the pound has fallen. It has dropped about twice as much as the yen over the last three months vs. the dollar.
By February, the UK’s interest rates are projected to be 5.4%, a 300 basis point increase from present levels that will severely hurt the economy. However, the sharp increase in yields investors now receive for holding UK bonds hasn’t done anything to strengthen the pound.
Short-term currency forecasting is notoriously difficult. Still, some, including Nomura Holdings, predicted that sterling would go below parity with the dollar by the end of November, dismissing any immediate BoE intervention.
The BoE stated late Monday that it was actively monitoring the markets and would not hesitate to raise rates if necessary to achieve its inflation target. Many traders had suggested the bank raise rates right away.
If the BoE is compelled to meet outside of its planned time, it might escalate the issue by encouraging traders to speculate about what else it might do. On the other hand, more violent swings can be anticipated if the BoE delays a raise.
If the government insists on further unfunded tax cuts, confidence in the UK will not return anytime soon. The Truss team is convinced that its measures will pay for themselves in the medium term because of faster economic development, so a change in position also looks improbable. Therefore the outlook for British pound (6B) futures remains bleak.
