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The British economy is not at its best, as evidenced by the impressive fall of the pound sterling, which on Monday approached the lowest level in its history against the dollar. This continued depreciation is fueling speculation that the Bank of England may intervene, to try to offset the impact on investor confidence of the massive tax cuts announced by the new government.
The pound sterling hit its lowest level against the dollar on Monday September 26, with budget announcements from London worrying investors about the health of British public finances, in a country that may already be in recession.
Sterling fell to $1.0863 for the first time since 1985, not far from the all-time high of $1.0520 that year. The British currency lost more than 7% in ten days, a movement of a magnitude very rare in the foreign exchange market.
Investors moved away from the pound following the announcement of the new Liz Truss government, which unveiled a series of fiscal stimulus measures on Friday. Specifically, they provide for the payment of part of the home’s energy bill and the renunciation of a series of tax increases.
Towards a Bank of England intervention?
This uninterrupted fall in the pound sterling is fueling speculation about a possible intervention by the Bank of England (BoE), to try to offset the impact on investor confidence of the massive tax cuts announced on Friday by the Liz Truss government. , in which many investors see above all a danger to British public finances.
“The BoE will have to take action today for sure, which will lead to a massive increase in interest rates to try to stabilize the British pound,” said Michael Every, a strategist at Rabobank in Singapore.
The situation is such that currency traders are now talking about the possibility of an emergency BoE meeting, with the key to an anticipated rate hike, as quoted by Wells Fargo’s Erik Nelson.
See: In the United Kingdom, a “mini-budget” of 150,000 million pounds sterling to support the economy
The package should force the UK to borrow an additional £72bn in the markets, worrying traders.
“The pound is in danger”
“Between Brexit, the Bank of England’s delay in raising rates and now fiscal policy, I think the UK will go down in history as one of the worst macroeconomic performances by a major country,” the former US Treasury secretary said. US Larry Summers, who believes the pound can catch up with the dollar.
“The pound is in danger,” warned Deutsche Bank analyst George Saravelos, noting that the currency is falling even as UK debt lending rates rise, “which is very rare in a developed economy.” “. “We are concerned that investor confidence in the UK is rapidly eroding,” he added.
If it was particularly battered, the British pound was not the only one to suffer. The euro fell to a new 20-year low on Friday at $0.9681 per euro. On Monday, the European currency also hit a 20-year low against the dollar at 0.9569, as the results of the Italian legislative elections heightened recession fears.