Pound US Dollar Exchange Rate Slumps Closer to Parity in the Wake of Kwasi Kwarteng’s Tax Plans
The Pound US Dollar (GBP/USD) exchange rate fell to record lows as the UK government unveiled further plans to lower taxes and ramp up public borrowing.
At time of writing the GBP/USD exchange rate is trading around $1.1758, a 0.86% fall from this morning’s opening levels.
Pound (GBP) Crashes on Evaporating Confidence in the UK Economy
The Pound (GBP) not only failed to recover from the fallout from the mini-budget on Friday but extended its losses over the weekend.
Sterling plummeted nearly 5% against the ‘Greenback’, the lowest since decimalisation in 1971. Confidence in the UK economy has plummeted drastically amid fears over rampant borrowing to fund the sweeping tax cuts. Combined with a disappointing 50bps rate hike from the Bank of England (BoE), Sterling edges ever closer to parity.
With inflation still out of control, recession nearing ever closer, and now the surge of borrowing to fund Kwarteng’s £45bn fiscal plan, confidence is rock bottom. Anxiety over a looming recession is also continuing to weigh heavily on the Pound. However, investors will now be eagerly anticipating an intervention from the BoE. An emergency meeting from the central bank could be on the cards to stem the Pound’s losses.
Paul Dales of Capital Economics has said that the central bank will have two options now. Firstly, BoE Governor Andrew Bailey could come out and turn hawkish, stating the BoE’s commitment to the 2% inflation target and pledge an aggressive rate hike in November. The more dramatic and immediately effective move would be to announce a substantial and immediate interest rate hike.
Unless the BoE announce such a drastic move, the Pound could remain under pressure until confidence returns.
US Dollar (USD) Continues its Rally amid Risk-Averse Markets
The US Dollar didn’t skip a beat and continued its strengthening from Friday’s close as the US Dollar Index soared to its highest levels since May 2002.
Ongoing risk-averse market moods, combined with the persistently hawkish Federal Reserve, the ‘Greenback’ continues to rally against its rivals today. Rising US Treasury bond yields are also boosting the US Dollar.
Lending continued support to the “greenback’ is the maintained hawkish position adopted by the Fed. Over the weekend, Atlanta Fed President Raphael Bostic emphasised the Fed’s position on tackling inflation. He added that the Fed can tame inflation without substantial job losses, thanks to the economy’s continuous resilience. Bostic added:
‘Inflation is high. It is too high. And we need to do all we can to make it come down. We need to have a slowdown. We are going to do all that we can at the Federal Reserve to avoid deep, deep pain.’
Pound US Dollar Forecast: Hawkish Fed Speeches to Bolster the Greenback?
Looking ahead, the Pound US Dollar exchange rate could edge even closer to parity as several Fed speeches are planned today. An expected continuation of hawkish rhetoric could keep USD investors buoyed.
Meanwhile, a lack of major data will leave investors watching the BoE closely for any signs of intervention. If the central bank opts to do nothing, Sterling could continue its slide.