Sterling fell to an all-time low against the US dollar in overnight trading on Monday, fueling speculation of an emergency interest rate hike from the Bank of England over the coming days.
Sterling fell as much as 5% against the dollar, at a historic low of 1.0325 during its extended overnight declines from last week’s currency market slump that followed the “mini-budget” statement from Finance Minister Kwasi Koarting.
That statement, unveiled in just the third week of Prime Minister Liz Truss’s new government, included $80 billion in new borrowing – the largest increase since 1972 – to fund both planned caps on consumer energy prices over the coming winter and tax cuts. The highest earners in the world’s fifth largest economy.
“I want to see, over the next year, that people keep more of their income, because I think it’s the British people who are going to lead this economy,” Quarting told the BBC on Sunday.
UK money market trading is now priced at least another 1.75% in a near-term rate hike from the Bank of England to defend the currency – now trading at 1.0725 – from sliding into parity against the dollar.
The US Dollar Index, which measures the greenback against a basket of six world currencies, posted a gain of 0.37% at a two-decade high of 113,627.
“We are now seeing rates rise to more than 4% next year, compared to a peak of 3% previously,” Moody’s Investors Service said Monday. “[Kwarteng] He also stressed the government’s goal of raising the trend of the economic growth rate to 2.5% despite the difficulty of achieving this.
The Bank of England, which last week raised its key bank interest rate by 50 basis points, to 2.25%, as part of its ongoing effort to tame the fastest inflation in decades, may intervene directly in foreign exchange markets to prop up the pound, either with its $80 billion in reserves or at the behest of British Treasury.
“As a turnaround in the newly announced financial measures appears unlikely so far, many are calling for further tightening from the Bank of England,” said Chris Turner, head of global markets at ING. “However, the FX-related rally may be unsuccessful (and the cable may soon reach parity).
The pound’s collapse has also pushed up government borrowing costs, with benchmark UK 2-year bond yields, the equivalent of Treasuries, rising more than 95 basis points over the past two trading sessions to a 2008 high of 4.559%.
Meanwhile, 10-year Treasury yields are on track for their biggest monthly increase since 1957, according to Reuters data, and were last seen trading at 4.1%, while 5-year securities gained 50 basis points during today’s session alone. . by 4.571%.