“The British pound is in danger.” George Saravelos, an analyst at Deutsche Bank, did not hide his concern on Friday regarding the British currency. And for good reason, the British currency plunged more than 7% in 10 days, a move of a very rare scale in the currency market. On Friday it fell below the symbolic threshold of $1.10, dipping to $1.0863 for the first time since 1985, not far from the all-time high of $1.0520 that year. This is due to budget announcements in London considered worrying by investors about the health of public finances, while the country is in recession according to the Bank of England. Since the beginning of the year, the pound has lost almost 20% of its value against the dollar.
Gilt rates are rising
An even more worrying drop in their eyes as interest rates on British debt rise. Which “is very rare in a developed economy,” he said. On Friday, moments after the Liz Truss government announced a hugely expensive (over £100bn) economic stimulus package, the UK’s 10-year lending rate fell above 3.8 %, a level not seen since 2011. More specifically, the ten-year interest rate The rate on “gilts” (British government bonds) rose to 3.84% during the session. At the beginning of September, the return was only 2.8% and had closed 2021 below 1%.
Debt on an “unsustainable trajectory”
An increase that reflects doubts about London’s ability to finance these measures. The combination of tax cuts and massive aid, which will force the UK to borrow an additional £72bn on the markets, raises fears of the worst for public finances. According to the Institute for Budget Studies (IFS), the Truss plan risks putting the debt on an “unsustainable path”. A prospect that can scare investors.
“This is very damaging to the UK’s reputation as a fiscally responsible nation,” said Andrew Sentence, a former Bank of England member.
Same story for George Saravelos of Deursche Bank: “We are concerned to see investor confidence in the UK rapidly eroding.”
Towards the pound-dollar parity?
Former US Treasury Secretary Larry Summers did not go there with the back of a spoon. “Between Brexit, the Bank of England’s delay in raising rates, and now fiscal policy, I think the UK will go down in history as one of the worst macroeconomic deals by a major country in a long time,” he said. According to him, the pound can reach parity with the dollar.
The situation is such that currency traders are now talking about the possibility of an emergency meeting of the Bank of England, with the key being an early rate hike, cited by Wells Fargo’s Erik Nelson, while they have raised 0, 5 points this week, at 2.25%
“It would send the wrong message to the markets”, warns Christopher Vecchio of DailyFX, because these unscheduled meetings “mean that the situation is very tense, dramatic”.
If it was hit particularly hard, the British pound wasn’t the only one to suffer on Friday. The euro fell to a new 20-year low at $0.9681 per euro.