“The pound sterling is in danger”. George Saravelos, analyst at Deutsche Bank, did not hide his concern Friday with regard to the British currency. And for good reason, the British currency plunged by more than 7% in 10 days, a movement of a very rare scale on the foreign exchange market. On Friday, it fell below the symbolic threshold of 1.10 dollars, going down to 1.0863 dollars for the first time since 1985, not far from the absolute record recorded that year, ie 1.0520 dollars. This is due to the 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 start of the year, the pound has lost nearly 20% of its value against the dollar.
Gilt rates are rising
A fall all the more worrying in his eyes as the borrowing rates of the British debt increase. Which “is very rare in a developed economy,” he said. On Friday, moments after Liz Truss’ government announced a massively expensive (over £100bn) economic stimulus package, the UK’s ten-year borrowing rate did indeed drop above 3.8%, a level not seen since 2011. More specifically, the ten-year “gilts” (British government bonds) rate rose to 3.84% during the session. At the beginning of September, the return was only 2.8%, and had ended 2021 at less than 1%.
Debt on an “unsustainable trajectory”
A surge that reflects doubts about London’s ability to finance these measures. The mixture of tax cuts and massive aid, which will force the United Kingdom to borrow an additional 72 billion pounds on the markets, raises fears of the worst for public finances. According to the Institute for Budget Studies (IFS), the Truss plan risks putting debt on an “unsustainable path”. A prospect that may scare off investors.
“This is very damaging to the UK’s reputation as a fiscally responsible nation,” said former Bank of England member Andrew Sentence.
Same story for George Saravelos, of the Deursche Bank: “We are concerned to see investor confidence in the United Kingdom eroding rapidly”.
Towards pound-dollar parity?
Former US Treasury Secretary Larry Summers didn’t 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 macro deals of a major country in a long time,” did he declare. 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 to an anticipated rate hike, quoted by Erik Nelson, of Wells Fargo, while they have were raised by 0.5 points this week, to 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 particularly battered, the pound sterling was not the only one to suffer on Friday. The euro fell to a new low for 20 years, at 0.9681 dollar for one euro.