Andrew Bailey Bank of England pound sterling dollar parity interest rates Budget – Hollie Adams/Bloomberg
The Bank of England is understood to be preparing an intervention after the pound crashed to an all-time low against the dollar.
The Bank is expected to issue a statement as soon as today amid mounting pressure on Governor Andrew Bailey for an intervention to help shore up the economy.
This could be a verbal intervention to calm markets or, in a more extreme case, an unscheduled increase in interest rates – which were raised to 2.25pc just last week.
It is understood that a statement today is probable, but not definite. The Bank declined to comment on the nature of any intervention.
The possible intervention comes amid market turmoil after Chancellor Kwasi Kwarteng last week unveiled the biggest package of tax cuts in 50 years and hinted at more to come.
The measures, which include scrapping the additional rate of income tax and cutting stamp duty, are aimed at fuelling economic growth.
But markets have been spooked amid fears Prime Minister Liz Truss is pushing up public borrowing to unsustainable levels.
Kwasi Kwarteng keeps quiet on market turmoil
Kwasi Kwarteng is keeping his lips firmly sealed about today’s market turmoil.
It’s an awkward walk to the office for the Chancellor as he’s grilled by a BBC reporter in this classic of the genre…
Housebuilders sink as pound slumps
Housebuilders were among the worst performers on the FTSE this morning as the pound languished near its all-time low.
Taylor Wimpey and Persimmon were the biggest fallers on the blue-chip index, shedding more than 6pc, while Berkeley and Barratt fell more than 5pc.
Retailers including B&M, Marks & Spencer and Currys were all in the red amid concerns about the economic outlook.
Meanwhile, companies that export a lot of their products outside the UK rallied. Consumer goods giant Reckitt Benckiser, healthcare group GSK and engineer Smiths were among the biggest winners.
Andrew Bailey ‘didn’t get the memo’ on tackling inflation, says hedge fund boss
Sir Paul Marshall, a hedge fund boss and major investor in GB News, has launched a blistering attack on Bank of England chief Andrew Bailey over his failure to act.
He wrote in the Financial Times:
The bigger problem for Liz Truss’s government is the Bank of England. It seems that the Governor, Andrew Bailey, did not get the memo.
Our central bank has been behind the curve since inflation first started to rise sharply in 2021. Initially the BoE was in good company. But now it is starting to lag its counterparts around the developed world.
The Bank of England effectively lost control of the UK bond market last Thursday when it raised interest rates by 50 basis points, instead of the 75bp that the Fed and the European Central Bank raised by. Its timidity is now having an impact on both the gilt market and sterling.
That is the essential context for the market reaction to the mini-Budget. Once you lose market confidence it is doubly hard to win it back.
This cannot be what Truss, and her Chancellor Kwasi Kwarteng, wanted at all. They had been hoping for and hinting at a more muscular stance from the BoE to underpin financial market confidence in the UK, even at the expense of some short-term pain.
BoE’s bond losses hit £200bn after market rout
The sell-off in UK assets since Kwasi Kwarteng’s mini-Budget last week has pushed market losses on the Bank of England’s government bond portfolio to more than £200bn.
The shortfall reflects the difference between what the Bank paid for gilts when it kicked off quantitative easing during the financial crisis in 2008, after the Brexit vote and when the pandemic hit, against the current market price, Bloomberg reports.
The bonds were already in the red, but the rout sparked by the Chancellor’s tax-slashing Budget has made things much worse.
The collapse comes just before the BoE plans to begin unwinding its quantitative easing programme by selling gilts, meaning the losses will start to be crystallised.
The first sale in scheduled for next week, with a £40bn target over the following 12 months.
Labour: We’re the party of economic responsibility
Labour Shadow Chancellor Rachel Reeves – Ian Forsyth/Getty Images
With markets in turmoil, Labour are trying to wrestle the mantle of fiscal responsibility away from the Tories.
Shadow Chancellor Rachel Reeves has taken aim at the Government for gambling with the economy, adding that Labour would pursue a responsible fiscal policy that provides funds for public services.
Speaking at the Labour Party conference in Liverpool, she said:
It is becoming clearer by the day that Labour is the party of economic responsibility and the party of social justice. It is time for a government that is on your side, and that government is a Labour government.
Parity or NFL in London – which comes first?
Here’s one US economist’s wry take on the outlook for the pound…
Traders ramp up bets on interest rate rise
With all eyes now on the Bank of England, traders have stepped up their bets on interest rate rises.
Markets are pricing in up to 200 basis points of rate rises by the next meeting in November.
That would imply a big unscheduled rise – four times the size of its last hike – and would take interest rates from their current level of 2.25pc to 4.25pc.
Pound cuts losses against dollar
Sterling has trimmed its losses against the dollar as markets gear up for a statement from the Bank of England.
The pound has risen by above $1.08 after tumbling to its lowest level on record earlier in the day.
It’s understood the Bank of England is likely to make a statement today.
BoE intervention ‘probable but not definite’
My colleague Tom Rees has broken the news that the Bank of England is preparing an intervention to help shore up the pound.
It is understood that an announcement today is probable, but not definite. The Bank declined to comment.
Kwasi Kwarteng ‘not expected’ to make statement, says Downing Street
It doesn’t look like the Chancellor will be making a statement today, as Downing Street declines to comment on the pound’s dramatic fall.
The Prime Minister’s spokesman said: “I think that the Chancellor has made clear that he doesn’t comment on the movements around the market and that goes the same for the Prime Minister.”
Instead, No 10 stuck by the Government’s plans to boost growth.
The spokesman said: “The UK with the second lowest debt-to-GDP ratio in the G7 is investing in its future. That’s through a growth plan while remaining fiscally responsible and committed to driving down debt in the medium term.
“The growth plan, as you know, includes fundamental supply side reforms to deliver higher and sustainable growth for the long term, and that is our focus.”
Downing Street also declined to say whether the Chancellor would be meeting with Andrew Bailey as a matter of urgency to discuss the sudden drop in the pound.
It comes amid speculation the Bank of England will be forced to again raise interest rates.
The spokesman said: “I know he speaks regularly to the Governor of the Bank of England. I don’t know when the next conversation is scheduled to be.”
The pair meet “regularly”, the spokesman said. “I’m not aware of any change to that regular series of meetings that they have which the Chancellor set out over the weekend.”
Wall Street set to slump at the open
Wall Street’s main indices look set to open in the red as jitters spread through the global economy.
Markets are expecting more interest rate rises by the Federal Reserve, fuelling fears that the US could be tipped into recession.
Futures tracking the S&P 500 and Dow Jones fell 0.8pc, while the tech-heavy Nasdaq was down 0.5pc.
Closer to home, the FTSE 100 has reversed its early gains and is now trading down 0.7pc.
Reaction: I fear for how low pound can go
Here’s more from FX analyst Viraj Patel, who strikes a grim tone over the outlook for the pound if the BoE fails to intervene.
Pandemic savings evaporate as cost-of-living crisis intensifies
The slump in the pound is a further blow to Brits at a time when households are already being squeezed, as my colleague Eir Nolsoe reports:
The cost-of-living crisis is whittling away pandemic savings, with monthly spending on essentials costing £145 more on average since the beginning of the year.
The spiralling cost of living is forcing three in ten Britons to rely on savings only to afford basic necessities like shelter, food and fuel, according to research by KPMG. Another one in ten have already depleted their reserves, and a similar share had none to start with. The findings are based on a survey of 3,000 of consumers at the start of this month.
It shows that half of Britons are already stretched beyond their means or have no funds to cushion against further price rises. Over a third of people who started 2022 with money to fall back on now only have a quarter or less of the initial amount left.
The figures suggest that pandemic savings are being wiped out by inflation eating into real incomes. Bank of England data shows that personal deposits surged during the lockdowns and consumer debt fell. Households on average put 26pc of their disposable income into savings between April and June in 2020, a record since the data series began in 1987.
Read Eir’s full story here
What can the BoE do to help the pound?
Calls are growing for the Bank of England to intervene urgently to help the ailing pound. But what options does Andrew Bailey have?
FX analyst Viraj Patel looks at some of the potential measures, but warns there’s “no easy way out”.
How to protect your wealth as the pound collapses
Investors have seen the pound fall to an all-time low against the American dollar, as fears mount that the new Government is pushing public debt in Britain to unsustainable levels.
However, DIY investors need not panic, as experts have said the weakness of sterling can be used to their advantage. This is because a lowly pound works in favour of a portfolio that is invested across global stocks.
For example, the S&P 500, America’s benchmark index, has fallen by 23pc in dollars this year. However, losses stand at just 4pc in sterling terms.
Lauren Almeida looks at how investors can maximise their returns when sterling is weak.
Read her full story here
BlueBay shorts pound as it eyes parity with dollar
The pound is BlueBay Asset Management’s biggest currency short position as it bets the UK can do little to halt its slide.
Mark Dowding, chief investment officer of BlueBay, which manages $112bn in assets, said: “Short GBP is the largest FX short we have held this year. We are not changing this view and think that a move towards parity is likely.”
The sharp slide in the pound has fuelled speculation that the Bank of England will need to step in to raise interest rates, but Mr Dowding said even that might not be enough.
He added: “An emergency rate hike would probably be a catalyst for a vote of no confidence in the Truss Government and would see political crisis.
“For now we think the Bank of England does nothing. The pound will weaken, but this should be more of a gradual slide.”
Bank of England outlines 2022 stress test plan
With impeccable timing, the Bank of England has released details of the framework for this year’s stress test on banks.
The Bank said the 2022 scenario will “test the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies, large falls in asset prices and higher global interest rates, and a separate stress of misconduct costs”.
The scenario assumes interest rates will surge to 6pc in early 2023 – an outcome that looks even more likely after the recent slump in the pound.
Reaction: Pound will fall further if Bailey doesn’t act
There’s mounting pressure on Bank of England Governor Andrew Bailey to intervene after the pound tumbled to an all-time low.
Markets are now expecting the Bank to raise interest rates ahead of the next scheduled meeting in November, with traders pricing in around 75 basis points of increases by the end of the week.
That means there’ll be a nasty shock if a rate rise doesn’t materialise, with Samuel Tombs at Pantheon Macroeconomics warning of further losses if Bailey fails to act.
Read more on this story: Bank of England urged to raise rates as markets bet on 6pc by next year
Keir Starmer: Workers will pay the price of market turmoil
Labour Keir Starmer – Stefan Rousseau/PA Wire
Labour leader Sir Keir Starmer has blamed the Government for the “real turmoil” in markets and warned working people would pay the cost.
Speaking at the Labour Party conference, he said ordinary Britons would have to endure higher mortgages and prices as a result of tax-cutting fiscal plans that have sparked a slump in the pound.
Sir Keir said: “The net result of Friday so far is taxes down for the richest and prices up for working people.”
He added that the country was “very worried” about the message Liz Truss’s Government was sending.
UBS: Investors see Tories as ‘Doomsday cult’
Investors see the Conservative as a “Doomsday cult”, according to a top analyst at UBS.
In a note to clients this morning, Paul Donovan wrote:
The global signals from the UK’s mini-budget matter. Modern monetary theory has been taken into a corner by the bond markets and beaten up.
Advanced economy bond yields are not supposed to soar the way UK gilt yields rose.
This also reminds investors that modern politics produces parties that are more extreme than either the voter or the investor consensus.
Investors seem inclined to regard the UK Conservative Party as a Doomsday cult.
What the falling pound means for your wallet
Pound sterling dollar iPhone – AP Photo/Jae C. Hong
The pound sunk to an all-time low against the American dollar overnight, following Chancellor Kwasi Kwarteng’s “mini-Budget” last week.
Investors have become fearful that Prime Minister Liz Truss’s new administration is borrowing at unsustainable levels, pushing the pound to new lows. This has been compounded by strength in the US dollar, where investors are more optimistic.
What does it mean when the pound drops, and how will it affect your wallet?
Here’s Lauren Almeida with everything you need to know – read her guide here.
Labour urges investigation into mini-Budget ‘leak’ amid hedge fund shorts
Labour has urged the City watchdog to investigate a potential leak of last week’s mini-Budget amid concerns hedge funds have cashed in by shorting the pound.
Tulip Siddiq, shadow City minister, called for a probe by the Financial Conduct Authority following reports some hedge fund bosses made “small fortunes” by betting sterling would fall after Kwasi Kwarteng’s statement on Friday.
She told the Evening Standard: “The Financial Conduct Authority should investigate any potential wrongdoing, to determine whether it is possible that any leaks or information provided by this Conservative Government to their wealthy friends contributed to the collapse of the pound.”
A report in the Sunday Times described a dinner of hedge fund managers, who allegedly supported the Government, about a week before the mini-Budget. They were said to be shorting the pound, with some making “small fortunes” from their bets.
There were also claims that the plan to abolish the 45pc additional rate of income tax had been leaked in advance.
Public borrowing costs soar as markets punish Kwarteng
UK government borrowing costs have soared above 4pc for the first time in more than a decade as a historic rout on bond markets in the wake of Kwasi Kwarteng’s mini-Budget deepens.
Investors continued to dump UK debt on Monday morning after being spooked by the Chancellor’s plans to ramp up borrowing to pay for £45bn of tax cuts and rising expectations of rapid Bank of England interest rate rises.
Tom Rees has the details – read his full story here.
Kwarteng ‘fanned flames’ with tax cut comments, says Labour
Labour has accused Kwasi Kwarteng of “fanning the flames” of the plummeting pound by hinting at fresh “unfunded” tax cuts.
Shadow Chancellor Rachel Reeves accused ministers of recklessly gambling with the public finances and of spooking the markets with the “scale” of Government borrowing to pay for tax-cutting measures.
Over the weekend, Mr Kwarteng brushed off market reaction to his mini-Budget and suggested even more tax cuts could come.
Talking from the Labour conference in Liverpool, Ms Reeves told BBC Radio 4 Today: “It is incredibly concerning.
“I think many people had hoped over the weekend things would calm down but I do think the Chancellor sort of fanned the flames on Sunday in suggesting there may be more stimulus, more unfunded tax cuts, which has resulted overnight in the pound falling to an all-time low against the dollar.”
The shadow Chancellor doubled down on her comparison of Mr Kwarteng and the Prime Minister to “two gamblers in a casino chasing a losing run” and warned they were betting with the nation’s finances.
She added: “Here’s the thing, they’re not gambling their money, they’re gambling all of our money, that’s why it’s irresponsible and reckless as well as being grossly unfair.”
Allianz adviser urges BoE to raise rates
Mohamed El-Erian, an adviser to Allianz, has said the Bank of England should hike interest rates by one percentage point if Chancellor Kwasi Kwarteng doesn’t reserve the measures in his mini-Budget.
He told BBC Radio 4: “If I were the Governor and the Chancellor is not modifying his plan, I would increase interest rates and not by a little, by 100 basis points, by one full percentage point to try and stabilise the situation.”
Kwarteng must do more to reassure markets, says Truss adviser
Gerard Lyons Liz Truss economy – Jeff Gilbert
Chancellor Kwasi Kwarteng must do more to reassure markets about his plans for the economy after the pound’s slump, a top adviser to Liz Truss has said.
Gerard Lyons, an external adviser to the Prime Minister, told Bloomberg: “He needs to reaffirm that tax cuts are only part of the story, not the full story. What they’re following is a supply-side agenda.”
However, Mr Lyons said the UK government didn’t need do a “U-turn,” adding that it was also incumbent on the Bank of England to take action.
He said: “It’s not just down to the Chancellor, it’s also down to the central bank to try and get ahead of the curve, to try and address the market concern. We need to move away from cheap money.”
Mr Lyons, who is also chief economic strategist at online wealth manager Netwealth, said the Chancellor’s fiscal package had been targeted at a domestic and business audience, but didn’t do enough to calm investors.
“Markets were still not convinced that his fiscal easing was necessary, non-inflationary and affordable. It’s quite clear from the market reaction that those concerns were not fully addressed.”
Trader who made billions in 2008 buys up pound
Talking of bargain hunting, a former hedge fund manager who shot to fame for making billions during the global financial crisis is buying up the pound at a discount.
Stephen Diggle used 10pc of the assets of a “small fund” to buy sterling, adding he would use the currency to finance investments in the UK, especially dollar-earning stocks.
He told Bloomberg: “I’m not calling a trading low. Who the hell knows? But against a 5- or 10-year average sterling is very cheap now.”
Mr Diggle co-founded volatility hedge fund Artradis in 2001. It became famous for a $2.7bn volatility trading gain in 2007 and 2008.
Pound claws back some losses
After crashing to an all-time low in the early hours of the morning, the pound is started to claw back some of its losses.
The move comes amid expectations that the Bank of England will take a more aggressive approach to raising interest rates – and even make an unscheduled announcement ahead of November’s meeting.
There could also be some bargain hunting going on as opportunistic traders look to buy up the pound on the cheap.
Lib Dems: Recall Parliament to fix ‘shambolic’ Budget
Wendy Chamberlain, Liberal Democrat chief whip, calls for Parliament to be recalled so that MPs can scrutinise Kwasi Kwarteng’s “failed” Budget.
Last week the Chancellor announced a shambolic Budget that gave huge unfunded tax cuts to big banks and the wealthiest while leaving struggling families and pensioners in the cold.
As a result we are seeing the pound plummet into free fall as the markets give the Conservatives a damning vote of no confidence.
The Government must urgently recall Parliament so Kwasi Kwarteng can fix this failed Budget, before it does any more damage to our economy and people’s livelihoods.
It’s clear the Conservatives are totally out of touch and don’t have a proper plan to steer the economy through the difficult months ahead.
MPs must be given a chance to scrutinise these disastrous proposals now before it’s too late.
Pound is worst G10 currency this year
The latest slump in the pound makes it the worst performing G10 currency in the year to date.
It’s now down 21.1pc against the dollar and is veering dangerously close to parity.
Other underperfomers among the G10 include the Japanese yen and Swedish krona, which are both down 19.9pc against the dollar.
At the other end of the spectrum, the Swiss franc and Canadian dollar are down only 7.1pc, making them the top performers.
Still, the figures highlight just how strong the dollar has been recently…
Oil drops below $85 for first time since January
It’s not just the pound that’s in decline this morning – oil has also also taken a tumble.
Benchmark Brent crude fell below $85 a barrel for the first time since January, mirroring recent losses for West Texas Intermediate.
It comes amid mounting concerns over a global economic slowdown.
Rising interest rates, Russia’s invasion of Ukraine and continued Covid lockdowns in China have hit supplies and fuelled fears of lower demand.
Pound falls against every currency in the world
Unsurprisingly, the focus is on the pound’s fall against the dollar. It’s now trading at its all-time low.
But the British currency has racked up losses across the board. In fact, it’s currently down against every single other currency in the world, from the Albanian lek to the Zambian kwacha.
My colleague Tim Wallace explains the significance:
That is dire for importers – which is most of us, given the UK’s significant trade deficit – but could offer a silver lining to exporters, who are finding their British-made goods becoming more competitively priced in every corner of the globe.
FTSE risers and fallers
The FTSE 100 has held up in early trading despite the broader turmoil on markets.
The blue-chip index rose 0.4pc in early trading, clawing back some of its losses after Friday’s sell-off as the slump in the pound boosted dollar-earning stocks.
Consumer staples including Diageo and Reckitt Benckiser pushed higher. Unilever, which also announced that boss Alan Jope will retire next year, was the biggest boost, rising 2.6pc.
Healthcare stocks AstraZeneca and GSK also gained.
Oil and mining stocks were in reverse, tracking crude prices lower.
The domestically-focused FTSE 250 fell 0.2pc.
UK borrowing costs surge
Bond yields have jumped in early trading, pushing up the cost of Government borrowing as markets baulk at the UK’s fiscal plans.
Yields on two-year gilts have surged 55 basis points to 4.5pc, while the 10-year is at 4.1pc.
The movements mean it’s getting more expensive for the Government to borrow money – and that’s at a time when the Government plans to ramp up borrowing to help fund its massive tax cuts.
Some economists have accused Liz Truss of acting irresponsibly with the public finances.
Labour: Chancellor must set out ‘credible plans’
Shadow Chancellor Rachel Reeves has demanded Kwasi Kwarteng sets out “credible plans” after the pound sank to an all-time low against the dollar.
The Labour MP told Sky News:
This is a serious situation, a cause for concern. The Chancellor, instead of doubling down on his position on Friday, needs to now set out credible plans.
FTSE 100 edges higher
The FTSE 100 has edged higher at the open amid market turmoil sparked by Kwasi Kwarteng’s tax-cutting Budget.
The blue-chip index rose 0.3pc to 7,040 points following a sell-off on Friday.
Investors have been selling off UK assets in the wake of last week’s mini-Budget, but a weaker pound could help to prop up the internationally-focused FTSE 100.
The FTSE 250, which is domestically-focused, fell 0.5pc at the open.
Weaker pound could drive up beer prices, warns pub boss
Pound dollar beer Carlsberg Marston’s – etty Laura Zapata/Bloomberg
The tumble in the pound could drive up the price of beer, a top brewing boss has warned.
Paul Davies, chief executive of Carlsberg Marston’s Brewing Company, said the drop was “worrying” for the British beer industry, which imports beer and hops from overseas.
Asked if the value of the pound mattered, he told BBC Radio 4 Today:
Yes it does, many of the hops used in this country are actually imported and a lot of them, particularly for craft brewers, are imported from the States, so changes in currency is actually worrying for industry, for sure, and then of course people drink a lot of imported beers from Europe, and the euro vs the pound is also something we’re watching very closely at the moment.
Of course things will rise, I would say as an industry we’re generally using British barley and we’re using a lot of British hops, but of course if you’re drinking double IPA that requires a lot of Citra hop and other hops from the States, and at some point that is going to have to be passed through to both the customer and the consumer if prices are this volatile.
Traders ramp up bets on interest rate rises
Traders are ramping up their bets on interest rate rises amid a crisis for the pound.
Money markets are now pricing in as much as 150 basis points of rate hikes by the next Bank of England meeting in November. That would take rates to 3.75pc.
Traders think the Bank will need to lift rates to 5.75pc by May. That would be the highest since 2007.
Cap Econ: Even BoE action might not be enough
Paul Dales continues…
That said, even this second option may not be the end of it. We’ve entered the part of the currency crisis where psychology takes over.
That could mean the markets continue to test the Bank and the pound falls further, suggesting that the Bank has to have another go to assert its authority.
And from a political economy point of view, it would be difficult for the Bank to hike interest rates just days after the Government outlined its new economic policies. And of course, higher interest rates just make the sustainability of the government’s fiscal plans even more questionable.
A common thread here is that in all outcomes, the UK will face higher interest rates, continuing concerns about long-term fiscal sustainability and the gradual realisation that period of tighter fiscal policy will be needed further down the line. And all of that will weigh on the economy.
Capital Economics: BoE may raise rates today
Paul Dales, chief UK economist at Capital Economics, says the Bank needs act decisively to regain the initiative.
He says it could be forced to raise interest rates by 100 basis points or even 150 basis points – i.e. to 3.25pc or 3.75pc – “perhaps as soon as this morning”.
“By bringing forward a lot of the policy tightening that might needed to have happened anyway, the Bank would demonstrate in no uncertain terms that whatever the government does it will ensure that inflation returns to 2pc. This would go a long way to easing the crisis,” he says.
A less drastic option he outlines is that Governor Andrew Bailey could emphasise the Bank’s commitment to the 2pc inflation target and signal an aggressive increase in rates at the November meetings.
Mr Dales adds:
If this were coordinated with a message from the Government that it is committed to long-term fiscal discipline and will bring forward plans to spell out how it intends to keep the public debt position stable following last week’s fiscal splurge, then it could relieve some downward pressure on the pound.
This would mean that Bank Governor Bailey has his “whatever it takes” moment and credibility is restored.
Former Bank of England official: I would be worried
There’s a damning indictment from Sir John Gieve, former Deputy Governor of the Bank of England.
Asked how he’d be feeling if he were still in his old job, he said: “I think I would be worried.”
He told BBC Radio 4:
The Bank and the Government have indicated that they are going to take their next decision in November and publish forecasts and so on at that point. The worry is that they may have to take action sooner than that.
When the currency moves, there are two instruments available, one is to use the country’s reserves to buy pounds and therefore increase its value.
We don’t have many reserves compared to the scale of currency markets so I think that is not seen as an effective weapon.
The other is to put up interest rates and we don’t have to do that, we haven’t got a fixed exchange rate, we have allowed the pound to depreciate from about 1.35 to about 1.05 today over the year so far so we can let it continue. But if it does continue it has an effect on prices and inflation.
We’re focused on growth, says Cabinet minister
Work and Pensions Secretary Chloe Smith has shrugged off the slump in the pound, insisting instead that the Government was focused on growing the economy.
The Cabinet minister told Sky News: “Of course lots of factors go into particular market movements. I am extremely focused on how to go for growth.”
Reaction: BoE could intervene this week
Simon Harvey, head of FX analysis at Monex Europe, reckons the Bank of England may need to intervene with an unscheduled interest rate rise.
Financial markets continue to voice their displeasure over the latest fiscal policy plans with their actions this morning as the fire sale in the pound continues.
At this point, with the pound flirting with its March 1985 low, momentum now drives the price action in the pound as the exodus from UK assets persists.
The sick irony of this is that the weaker the pound gets, the more expensive the Government’s liabilities become.
This is either through the price of its imported energy bill, which the Government is completely exposed to given the energy price cap policy for households, or higher financing costs due to more expensive gilt yields.
Additionally, with the outsized market moves only hampering market functionality, the risk of the Bank of England intervening has increased sizably and we now look for an inter-meeting announcement in the early part of this week.
The question policymakers will be debating over is how large the interest rate hike needs to be in order to clot the bleed in financial markets.
With 75bps quickly priced in for November’s meeting, we’d argue that 50bps will be the minimum needed to turn the tide, however, we can’t write off the risk of a larger hike that would signal a greater level of intent from the BoE.
FTSE braced for turmoil
All eyes will be on the FTSE when markets open in an hour’s time for signs of the turmoil spreading to equities.
Investors dumped UK stocks on Friday amid fears the Government’s tax-cutting Budget will drive up debt and stoke inflation.
If the sell-off continues and widens into broader markets, there’s a risk Liz Truss’s administration will be forced to respond.
The domestically-focused FTSE 250 could be under more pressure than the FTSE 100, which is more internationally exposed and therefore could benefit from the weaker pound.
Analysts will have a close eye on retailers such as JD Sports, Tesco and Sainsbury’s, as well as pubs and restaurants like JD Wetherspoon and Wagamama owner Restaurant Group.
Dollar rallies with markets in crisis
It’s worth pointing out that the slump in the pound isn’t only due to domestic policies – it’s also a symptom of a strengthening dollar.
A gauge of the US dollar rose to a record high this morning as investors continue to pile into the safe-haven asset.
While the Chancellor’s tax-slashing Budget is behind the pound’s decline, the euro is struggling on signs Italy’s far-right alliance is on track to take power.
Traders ramp up bets on parity
It’s looking increasingly likely that the pound will fall to parity against the dollar this year.
After this morning’s slump to a record low, market bets suggest there’s now a 60pc chance of sterling slumping to just $1.
Traders are also expecting turbulence in the market, with the pound’s three-month volatility surging to 20.05pc. That’s just below the record 20.62pc hit during the 2020 pandemic meltdown.
The weakening pound means imports of goods in dollars – including oil and gas – will be even more costly.
It’s also bad news for tourists, who’ll find their money won’t go as far on trips to the US.
Reaction: Bank of England will be forced into action
Friday’s radical mini-Budget has already prompted traders to price in a huge one percentage point increase in interest rates at the Bank of England’s next meeting in November.
But after this morning’s brutal sell-off, some analysts think the MPC will have to roll out an unscheduled move to help shore up the ailing pound.
John Bromhead, currency strategist at Australia & New Zealand Banking Group, said:
The scale of the move today means the BoE will be forced into action, at the very least to try and jawbone some stability. An inter-meeting hike is incoming.
Liz Truss: We need to incentivise growth
Liz Truss has also defended the Government’s approach to the public finances.
In an interview with CNN over the weekend, she brushed off comparisons with US President Joe Biden, who said he was “sick and tired of trickle-down economics”.
She said: “We all need to decide what the tax rates are in our own country, but my view is we absolutely need to be incentivising growth at what is a very, very difficult time for the global economy.”
Asked whether she was “recklessly running up the deficit”, the Prime Minister said: “I don’t really accept the premise of the question at all.”
Kwarteng: There’s more to come
Chancellor Kwasi Kwarteng – JEFF OVERS/BBC
Markets had already been sent into a frenzy on Friday after the Chancellor used his mini-Budget to unveil the biggest package of tax cuts for 50 years.
But Kwasi Kwarteng has since doubled down on his fiscal policies, and that’s what seems to be driving this morning’s sell-off.
In a BBC interview yesterday, the Chancellor appeared unperturbed by the response, and said he wouldn’t comment on market movements.
Then he added that, when it comes to tax cuts, “there’s more to come”.
Chart: Pound slumps to all-time low
The pound sank to its lowest level ever in early trading in Asia as markets continue to feel the heat from Kwasi Kwarteng’s tax-slashing Budget.
Sterling dropped as low as $1.0327 before regaining some ground, but it’s still trading at around an all-time low.
Traders will now be focused on further declines, with fears the pound could slump to parity against the dollar.
Euro touches fresh 20-year trough
The euro also touched a fresh 20-year trough to the dollar on simmering recession fears, as the energy crisis extends towards winter amid an escalation in the Ukraine war.
The dollar built on its recovery against the yen following the shock of last week’s currency intervention by Japanese authorities, as investors returned their focus to the contrast between a hawkish Federal Reserve and the Bank of Japan’s insistence on sticking to massive stimulus.
The dollar index – whose basket includes sterling, the euro and the yen – reached 114.58 for the first time since May 2002 before easing to 113.73, 0.52pc higher than the end of last week.
“The poor situation in the UK exacerbates support for the USD, (which) can track higher again this week,” Joseph Capurso, head of international economics at Commonwealth Bank of Australia, wrote in a report.
“If a sense of crisis about the world economy were to emerge, the USD could jump significantly.”
Reaction: ‘Sterling getting absolutely hammered’
Sterling tumbled to a record trough on Monday as traders scampered for the exits on speculation the new government’s economic plan will stretch Britain’s finances to the limit.
The pound’s searing drop helped the safe-haven US dollar to a new two-decade peak against a basket of major peers.
Sterling slumped as much as 4.9pc to an all-time nadir of $1.0327, before stabilising around $1.05405, 2.9pc below the previous session’s close.
“Sterling is getting absolutely hammered,” said Chris Weston, head of research at Pepperstone.
“Investors are searching out a response from the Bank of England. They’re saying this is not sustainable.”
Biggest one-day fall since 2020
The size of the pound’s intra-day decline this morning was the biggest since March 2020.
Option markets show the odds of the currency falling to parity with the dollar this year has increased to 63pc. The sterling was at $1.0487 as of 1pm in Tokyo.
Liz Truss, the Prime Minister, will face a rebellion from Tory backbenchers against her tax cuts if the pound falls to parity with the dollar, The Telegraph reported on Saturday.
Meanwhile, some in the markets are already calling for emergency Bank of England action to stem the tide, an unprecedented action in modern times that would risk adding to the sense of panic.
“The scale of the move today means the BoE will be forced into action, at the very least to try and jawbone some stability,” said John Bromhead, currency strategist at Australia & New Zealand Banking Group in Sydney.
An “inter-meeting hike is incoming”, with traders already pricing in a 100 basis-point increase by the central bank in November, he said.
Beleaguered currency fell to as low as $1.0350
The pound plunged almost five per cent to a record low after Kwasi Kwarteng vowed to press on with more tax cuts, even as markets delivered a damning verdict on the new Chancellor of the Exchequer’s fiscal policies.
The bulk of the currency’s slide on Monday took place in a frantic 20-minute selloff, evoking cries of a flash crash by traders. The beleaguered currency fell to as low as $1.0350, as investors punished the Chancellor for his unapologetic dash for growth.
The decline followed the release on Friday of the Government’s “Growth Plan”, a budget in all but name and the biggest tax giveaway in half a century. If the rout continues and widens into broader markets, there’s a risk Prime Minister Liz Truss’s days-old administration may be pushed into a crisis that could force a rapid policy response.
“The pound’s crash is showing markets have a lack of confidence in the UK and that its financial strength is under siege,” said Jessica Amir, a strategist at Saxo Capital Markets in Sydney.
“The pound is a whisker away from parity and the situation is going to only worsen from here.”
5 things to start your day
1) Tumbling gas prices on track to slash £60bn cost of energy bailout Britain’s energy bills freeze could prove much less costly than feared by early next year, as City forecasters predict that gas prices will plunge this winter following a successful scramble across Europe to fill reserves.
2) North Sea licenses to be sped up in race for more oil and gas Regulators are preparing to slash red tape in the North Sea in a bid to speed up the development of oil and gas wells, as part of Liz Truss’ dash for new energy supplies.
3) Reversing Britain’s post-pandemic worker crisis would boost economy by £23bn Reversing Britain’s post-pandemic worker crisis would boost the economy by £23bn and hand the Exchequer an extra £8bn in tax, new research has revealed, as Kwasi Kwarteng seeks to get more people back to work.
4) NatWest’s male bankers to get a year off for fatherhood NatWest has told its male bankers that they can take a full year off when they become a father, as it races to reinvent itself as more family friendly.
5) Traders bet against sterling as parity with the dollar looms closer Hedge funds have ramped up their bets against the pound to their highest level since the Brexit turmoil in 2019, as market confidence is rocked by Kwasi Kwarteng unleashing a borrowing binge.
What happened overnight
Hong Kong stocks opened down on Monday after another tough week across world markets fuelled by recession fears as central banks ramp up interest rates to battle inflation.
The Hang Seng Index plummeted 0.6pc, the Shanghai Composite Index dropped 0.8pc, while the Shenzhen Composite Index on China’s second exchange lost 0.6pc.
Tokyo stocks also opened lower following a long weekend. The benchmark Nikkei 225 index sank 1.4pc, while the broader Topix index lost 1.3pc.
Corporate: Finsbury Food (full-year results)
Economics: Chicago Fed National Activity Index (US)