Pound Sterling comes crashing down
Sterling is suffering badly today after the Chancellors 'not so mini-budget' created chaos on all financial markets. GBP is not just down and in the red across the board, but is bleeding out and there is a huge run on the currency at the moment.
£-€ has fallen 1.5% and has now lost 6-cents in just 5-weeks. On a £-€100,000 exchange, this equates to an extra cost of £1,300 today and £5,250 more compared to 5-weeks ago. £-$ is down 2.2% so far today and is facing its lowest level since 1985..
A crash was half expected yesterday on monetary policy, but instead it has come today through fiscal policy change. A radical economic plan not seen since the 1970's from Kwasi Kwarteng, will either be fantastic for growth or devastating to the economy. Growth Plan 2022 sees significant tax cuts, allowing the extra income to consumers and businesses to be spent or invested. As a services nation, on paper it kind of makes sense. But many will not like the narrative of the rich getting richer..
Near term, this has weakened the Pound's value due to investors being spooked by the scale of the fiscal giveaway. UK Government bonds rose by the highest daily amount on record and money markets have now priced in a 100% call for the BoE to raise rates by 100bp in November.
Before the fiscal announcement, a huge rate increase would have been supportive for Sterling. However, what's happened now is the BoE will most likely have to raise rates higher and for much longer than initially expected because high inflation will now probably remain for some time.
If the mission statement from the Government works, the Pound faces a bright future (whenever that is). If it doesn't, record lows will follow a collapsed Pound. For now, Sterling is hurting badly and we will find out early next week whether current levels are where GBP's value is set for the time being or whether traders have gone overboard with positions by 0.5%-1%.