British Pound Falls Below $1.11 Following New Economic Reforms

British Pound Falls Below $1.11 Following New Economic Reforms

The British pound hit its lowest level since July 1, 2020.

Matt Cardy | fake images

The beleaguered British pound fell 1.95% on Friday against the dollar, after the new UK government announced a sweeping economic plan in a bid to boost growth.

Sterling fell as low as $1.1032 at 12pm London time, a couple of hours after the measures were unveiled in the House of Commons.

The pound has fallen precipitously against the dollar this year, reaching levels this month not seen since 1985. Friday’s moves were heralded by the government as heralding a new era for the UK focused on growth, and included a combination of tax cuts and investment incentives for businesses.

The Bank of England said on Thursday that the UK economy was probably already in a recession as it raised interest rates by 50 basis points.

Investors dumped UK bonds amid an expected rise in government debt. Paul Johnson, director of the Institute for Fiscal Studies, said markets seemed “scared” by the scale of the “fiscal giveaway”.

UK 2-year government bond yields rose by the highest daily amount since 2009 on Friday, Reuters reported, with 10-year yields seeing their biggest daily rise since 1998. Yields move inversely to prices .

Jane Foley, senior FX strategist at Dutch bank Rabobank, said the market seemed skeptical of the government’s 2.5% growth target even though the measures were “blatantly designed to boost demand”.

“The obvious implication is that BOE rates are likely to be higher for longer than they otherwise would have been. While textbooks suggest higher short-term interest rates should support the currency, GBP has been proving since the spring that this is not always the case.
case,” he said in a note.

With the UK hitting a record debt-to-GDP ratio, the pound is vulnerable to a downward revision if foreign investors are reluctant to finance the deficit, Foley said; and “the markets clearly doubt the ability of this government to manage the debt.”

The euro was also lower against the dollar on Friday morning, falling 0.8% on the day to $0.976 after a release showed the euro zone Purchasing Managers’ Index fell to 48.2 in September. S&P Global said it meant the bloc was likely to enter a recession.

The dollar has been buoyed this year by stock market volatility and Federal Reserve interest rate hikes.

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