The British Pound plunged 4.7% to an all-time low against the US dollar during the Asia trading session on Monday morning.
Whilst its plummeting value is likely to have been exacerbated by low trading volumes in the currency pair during these hours – something which can cause increased volatility – the move mainly reflects the market’s reaction to measures announced by new UK Chancellor Kwasi Kwarteng.
On Friday, Kwarteng announced the largest package of tax cuts in the UK since the 1980s, which will be financed by a sharp increase in government borrowing, at a time when the UK’s debt is already high.
The announcement comes shortly after the same administration unveiled plans to spend an estimated £150 billion to shield consumers from soaring energy prices.
These plans have consequently rocked confidence in the GBP, as concerns mount about the sustainability of the UK’s national debt and also foreign investors’ willingness to fund it. Moreover, the plans also threatens to undermine the Bank of England’s efforts to bring inflation under control.
Central banks around the world have been increasing interest rates in recent months in an attempt to reduce inflation. In theory, interest rate rises control inflation by simultaneously reducing consumers’ discretionary income and increasing the incentive to save – both of which reduce demand which, in turn, reduces upward pressure on prices.
On the other hand, tax cuts are widely believed to be inflationary, as they increase disposable income and, therefore, fuel further demand, which, consequently, increases upward pressure on prices.
The pound’s fall adds to the Bank of England’s concerns about inflation, as it automatically increases the costs of anything imported into the country.
Last week, the BoE raised interest rates by 50 basis points, but there is speculation this morning that they may call an emergency meeting in an attempt to stabilise the sterling.
Of course, it must be noted that many currencies have seen a sell-off against the USD in recent sessions following the Federal Reserve’s decision to raise rates by 75 basis points last week. However, the GBP also experienced similar drops against the euro early this morning.
Whilst the GBP has regained some of its lost ground, those trading Forex pairs involving the GBP should be prepared for continued volatility throughout the session as the markets continue to react to this news.
Forex Trading with Admirals
With a Trade.MT5 account from Admirals, you can trade Contracts for Difference (CFDs) on Forex 24 hours a day, 5 days a week! Click the banner below in order to open an account today:
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
