The pound has fallen to its lowest level against the US dollar since decimalisation in 1971. That came after UK Chancellor Kwasi Kwarteng unveiled historic tax cuts funded by huge increases in borrowing. The pound has also been under pressure as the dollar has been boosted by the US central bank continuing to raise interest rates.
Peter Escho, the co-founder of investment firm Wealthi, said: “All currencies are getting sold off against the US dollar, so there is a large element of US dollar strength. But with the pound, it has really been exacerbated by news that the new government will be cutting taxes, which is inflationary. Add to that recent energy subsidies and news that the Bank of England might need to have an emergency rate-hike meeting, this all results in a sense of panic,” he added.
Last week, global markets tumbled after the US Federal Reserve and several other major central banks, including the Bank of England, raised interest rates as they try to control rising prices.
Blimey … it hasn’t taken long for the markets react in a big way to the implementation of LT’s “vision” …
The money markets reflect the assessment of how the UK will perform - both in government bond pricing and exchange rates. And the market reading is that the UK will have a terrible few years. The cost of government borrowing is set to go up - just as government borrowing will have to go up massively. The hope that low exchange rates will improve exporting has been massively hampered by the UK deciding to make trading with our largest market and closest neighbours as hard and as costly as possible.
The very worst thing the government could have done is the tax cutting exercise for the very few that Truss’ government has decided on. Mental.
@strathmore , Whilst l agree that the government has gone mad with the
borrowing, l disagree with your remarks about the EU being UKs largest
market?
This may be so, but, imports from EU are 50 billion more than our exports
to the EU !
Our trade with the rest of the world makes up 58% of our total exports !
This makes the rest of the world our biggest trading partner !!
Well there is inverted logic like I’ve never seen before. We trade more with the EU bloc than any other single country or indeed any other continent. Plus it is our physically closest market. It should be our first place to try to sell stuff outside the domestic market. It was dumb insanity to put up trade obstacles to this market.
Yes there was more imported from the EU - but as you have pointed out elsewhere that is primarily because the UK doesn’t make enough stuff that EU countries want. The numbers are dismal - the UK managed to only sell 146bn euros of stuff to the other 27 EU countries in 2021. While these EU countries managed to flog the UK 283bn euros of goods. In short, the UK is crap as selling its stuff overseas and happy to buy EU goods in vast quantities. These EU countries are producing stuff the UK likes, and is successfully pushing to sell them. Face the facts, UK business is poor at selling into EU countries.
Plus the trade imbalance with the EU is getting worse as services were not part of the trade deal with the EU. Another bit of dumb insanity.
But your post implies this is all the fault of the EU. How does that work?
@strathmore , It is what it is Straffy, and as such it was madness to ever
join the EU !!
Declining manufacturing, selling off companies to foreign interests etc!
Why join a club in order to trade when you have nothing too trade ?
especially when that club demands you pay premium membership fees of
billions of £s annually, and have to surrender your fishing industry to boot !
Utter madness!
I sense that the madness is inherent in our ruling classes ??
BTW , You mentioned you had a warehouse somewhere ?
Could that by why you hate Brexit so much ??
The pound plummeted in response to the Conservative government’s huge tax cutting mini-budget, dropping sharply as Chancellor Kwasi Kwarteng spoke on Friday.
The sell-off showed investors have doubts about the government’s plans, said Jane Foley, a currency strategist at Rabobank.
“They’re worried that some of these tax cuts that have been announced aren’t going to be fully-funded. That will result in a large amount of debt at a time when the Bank of England is going to be selling some of its holdings of UK government debt,” she said.
Investors’ concerns over the UK’s public finances have also led to a sharp increase in the cost of government borrowing. When governments want to borrow they sell bonds - usually bought by international investors. However, the interest on ten-year bonds has risen from 3.83% on Friday to 4.11%.
When people talk about the pound rising or falling, it means it can buy more or less of a foreign currency because the exchange rate has changed.
Very often, the pound is compared with the US dollar, given the huge size of the American economy.
It is also frequently compared with the euro, because of the UK’s close trading relationship with the EU, but can be matched to any currency around the world.
Today, most countries use what is called a floating exchange rate, where the value depends on how much people want a certain currency at a point in time.
Exchange rates are live, meaning they change constantly, because they reflect changing demand for each country’s currency across the globe.
Demand is affected by lots of different factors, including:
Economy: Successful economies have strong currencies because other countries want to invest there. They need the local currency to do so, pushing up demand and its value
Savings: If the Bank of England raises interest rates, holding savings or investments in pounds becomes more attractive, as you get more back for your money. So, demand for sterling increases
Prices: If UK goods are cheaper than those abroad, they are attractive to foreign businesses who need sterling to purchase them. This will tend to push up the exchange rate
Public finances: The state of a government’s bank balance, or how much debt it has, can also affect the exchange rate.
Speculation: The exchange rate is highly vulnerable to currency speculators, who buy and sell sterling based on expectations of future events
Much of the daily fluctuation in the exchange rate is because of these actions of the speculators and their confidence in a country’s economic prospects.
Wrong. The EU sell nearly twice as much to the US. Same to China. Overall exports to the UK are only a bit over 10% of the EU’s total exports to third countries.
I did not need to imagine these facts, just did a quick search. The data is all there. Saves posting something factually wrong.
Labour has accused Kwasi Kwarteng of “fanning the flames” of the falling pound by hinting at further “unfunded tax cuts”. Shadow chancellor Rachel Reeves accused Mr Kwarteng of “gambling all of our money”.
Talking from the Labour conference in Liverpool, Ms Reeves told BBC Radio 4’s Today programme: “It is incredibly concerning. I think many people had hoped over the weekend things would calm down but I do think the Chancellor fanned the flames on Sunday in suggesting there may be more stimulus, more unfunded tax cuts, which has resulted overnight in the pound falling to an all-time low against the dollar.”
Actually China became the EU’s biggest trading partner overtaking the US in 2020.
Although the US and the UK remain the EU’s largest export markets, trade with both countries dropped significantly
Is that always true? I can see that traders are often short to medium term focused but the market assessments are more medium term. If they are not then they risk gambling on today’s information rather than predicting the likely movement over a medium term (1-2 year) future. The markets are harshly pegging down sterling because they can see the UK will struggle with lower tax take, higher borrowing, higher payments on borrowing, lower rated government bonds, etc. etc… These are definitely medium term issues. And definitely correct assessments.
