Pound Plunges By The Most Since March 2020 Versus US Dollar - BLOOMBERG
(Bloomberg) -- The pound plunged by the most since March 2020, reaching the lowest in 37 years against the US dollar, as the UK’s expensive fiscal stimulus plan fuels bearish bets on the currency.
Sterling fell by as much as 3.5% to $1.0863 after the British government outlined new debt borrowing to fund increased spending. That has brought up talks among investors about the pound reaching parity with the euro and the dollar.
Investors and analysts are getting increasingly concerned about the outlook for the pound as the government’s proposed measures to boost the economy complicate the Bank of England’s mission to tamp down inflationary pressures. The borrowing required to fund the series of tax cuts and regulatory reforms is also sparking concern.
“It’s hard to imagine a worse setup for the pound,” said James Athey, investment director at abrdn. “As ever in such EM-esque situations the worry is that once this cat is out of the bag even a return to orthodoxy might not quell the investor rush for the exit.”
Chancellor of the Exchequer Kwasi Kwarteng on Friday outlined the government’s plans to stimulate the economy by reducing levies and increasing spending. Analysts fear though that the ballooning debt pile makes the nation more reliant on external capital flows to finance its deficit.
This means the end for the pound’s rout may not be in sight. Bloomberg’s options pricing model now shows a one-in-four chance the pound can reach parity with the dollar in the next six months, up from 14% Thursday. Risk reversals, a barometer of market positioning and sentiment, show that traders see the greatest downside risks for the sterling over the medium term in two years.
UK bond yields surged on Friday, with the 10-year gilt yields seeing their biggest one-day surge on record in Bloomberg data through 1989, closing 33 basis points higher on the day at 3.83%.
Bluebay Asset Management LLP chief investment officer and senior portfolio manager Mark Dowding said he’s been short on the pound for “awhile now” and only added to that position Friday.
“We think the government plans will challenge finances and that this will continue to weigh on UK gilts and the pound,” he said, adding the pound can reach parity versus the US dollar and the euro.
“I would say the market is very skeptical that sterling is yet in a buy in valuation,” said Steven Englander, global head of G-10 foreign-exchange research at Standard Chartered Plc. “It has to drop far enough for people to say that all this risk is priced in.”
Liz Truss’s government set out the most radical package of tax cuts for the UK since 1972, reducing levies both on worker pay and companies. The nation’s Debt Management Office increased its gilt sales plan for the fiscal year 2022-23 by £62.4 billion ($69.8 billion) to £193.9 billion to fund the spending. That compares to an estimated £60 billion increase expected by eight banks surveyed by Bloomberg.
“It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market,” former US Treasury Secretary Lawrence Summers told Bloomberg Television on Friday. “I think Britain will be remembered for having pursuing the worst macroeconomic policies of any major country in a long time.”