The British pound reached a record low on Monday following last week’s announcement of the nation’s greatest package of tax cuts in 50 years to support sluggish economic growth. In an interview with the BBC on Sunday, Kwarteng added that there was “more to come” and that he wants to keep cutting taxes in an effort to boost the UK economy.
Deficit spending not working anymore
The decrease in the pound is an illustration of the market’s doubts about the feasibility of such a move, given that the country is struggling with a slow economy and severe deficits. The GBPUSD pair dropped to 1.04 at the time of writing before erasing most of the losses. Investors are now openly discussing the GBP/USD parity.
According to the most recent information, traders for GBP/USD are pricing a 150 basis point (bps) BOE rate increase by November. Recent statements from UK Opposition Labour Finance Spokesperson Rachel Reeves, who said that “the decline in sterling puts pressure on the Bank of England to boost interest rates,” may also be fuelling the cable. The shadow chancellor also expressed her extreme concern about how the market will respond to the mini-budget.
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Early in the day, the Cable pair hit an all-time low due to concerns that the UK’s fiscal plan wouldn’t be able to solve the country’s economic issues. Additionally, the leader of the Labour Party attacked measures to decrease taxes.
Chances of parity
Investors appear to be continuing to avoid sterling unless something is done to address these budget issues or the economy displays some shockingly good growth figures.
For comparison, the FX options now value the likelihood of the GBP/USD reaching 1.00 by year’s end at 17%. This is an increase from 6% in late June.
“Given our bias for the dollar rally going into over-drive as well, we think the market may be underpricing the chances of parity,” economists at ING believe that further losses toward parity could be on the cards.
Additionally, the pound is still seen negatively by analysts at MUFG Bank, who note that the decline in trust in the pound is getting more serious.
“We remain bearish GBP as it approaches levels closer to the all-time low of 1.0520 in 1985. There is certainly no ‘happy-feel’ to this fiscal give-away and appears if anything to have increased the level of uncertainties that were already very elevated.” they said.