Pound Slammed in Asian Session, Markets Look to BoE to Restore Creditability

By | September 26, 2022

The British sterling fell by an average of 4.8 percent during Asian trade on Monday typically a time with low trade volumes and low price volatility. The low volume of trade (lower liquidity) might have played an impact on the dramatic price change, the primary cause is the fact that the UK’s newly appointed Chancellor Kwasi Kwarteng who announced additional tax cuts , the most significant in 50 years!

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Examining the current Bank of England (BoE) monetary policy stance the central bank appears to be planning to increase rates of interests to tackle inflation. inflation issue. However, an unorthodox fiscal policy that could benefit consumers in the short-term (energy price limits) could lead to rising inflation pressures in the long-term when the fiscal support has been removed. In addition, the issue is a weakening local currency that makes inflation at risk to increase to increase. Market pricing for money has seen a dramatic rise in the rate of interest from 57bps in the in the week prior to the November meeting, to 75bps on the day of the meeting.

BOE INTEREST RATE PROBABILITIES

Source Refinitiv

The tax cuts of the Chancellor are primarily funded through the borrowing (selling UK Government bonds known as “gilts”) in a time that it is clear that the UK economic system is currently in a crisis of debt. While the Chancellor has stated that the ratio of debt is a significant portion of GDP is predicted to decline however, the reverse is more likely. In conjunction with the deteriorating economic growth forecast for the UK the unfunded package has so far left the investors of the world extremely cautious about financing the deficit through buying UK bond issues. Many have dubbed this an imbalance of payments crisis. BoE intervention may ease the current risk-aversion to sterling.

UK ACCOUNT CURRENT BALANCE (YELLOW) Vs USD/GBP (GREEN)

 

Source Refinitiv

The price of sterling today is down against virtually every single currency around the world, indicating not only an overly strong dollar (cable) but more a global concern about the state in the UK economy. The economic calendar is thin today. However, it is expected that the BoE’s Tenreyro has been scheduled to address the BoE later this evening , and is likely to be scrutinized more than the norm.

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