The pound has slumped to an all-time low against the dollar after Chancellor Kwasi Kwarteng hinted at more tax cuts to come after after last week’s Budget.
Sterling tumbled almost 5pc to as low as $1.0327 in overnight trading, taking it below its 1985 low to the weakest since decimalisation in 1971.
It clawed back some ground to about $1.05, but the sharp decline has fuelled fears it could slump to parity by the end of the year.
The euro also hit a fresh 20-year low amid recession and energy security fears and on signs Italy’s far-right alliance is on track to take power.
The Chancellor has brushed off questions about the markets’ reaction to his mini-Budget – which outlined the biggest programme of tax cuts for 50 years – after it was announced on Friday.
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.
Mr Kwarteng rattled traders further yesterday by saying there was “more to come” on tax cuts.
The sharp decline in the pound has fuelled speculation that the Bank of England could be forced to step in with an emergency interest rate rise ahead of its next meeting in November.
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.
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
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
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)