Today, the pound fought back on global currency markets after falling to a record low versus the US dollar.
This morning in Asia, the pound surged as much as 0.8% against the dollar to $1.222, putting it within striking reach of where it was prior to Chancellor Kwasi Kwarteng’s controversial mini-Budget last week.
In an effort to reassure the financial markets, Liz Truss and Mr. Kwarteng are holding crucial talks with the Office of Budget Responsibility today.
Ms. Truss has vowed to continue forward with the development agenda despite growing unease on the Tory benches, especially in light of yesterday night’s shocking YouGov poll showing Labour with a 33-point lead.
A currency trader observes monitors in the foreign exchange dealing room at the KEB Hana Bank’s Seoul, South Korea, headquarters.
As with other global currencies this year, sterling has been hammered by the dollar as the US Federal Reserve raises interest rates to combat sky-high inflation.
In times of economic turmoil, the dollar has also profited from its status as a safe haven asset.
In response to the mini-Budget, the pound suffered a sharp dive as investors fretted over £45bn in unfunded tax cuts and a cap on energy bills that might cost £100bn.
The Bank of England was also criticized for moving too slowly and timidly to tackle inflation, which for the first time in four decades surpassed 10 percent this summer.
In order to restore order on the bond markets, the Bank intervened on Wednesday with a promise to purchase long-term UK government debt.
In a speech to business leaders in London yesterday night, Huw Pill, the Bank of England’s top economist, predicted that the rate-setting Monetary Policy Committee would respond “significantly” to recent events when it meets in early November.
Many analysts anticipate that the Bank of Canada will increase interest rates by as much as one percentage point – a far larger increase than the 0.25 and 0.5 percentage point increases seen so far this year.
The involvement in bond markets and expectation of additional rate increases boosted the pound.
Brian Daingerfield, head of G10 FX strategy at NatWest Markets in Connecticut, remarked, “The Bank of England took a fairly decisive action to stabilize the markets.” And this is seen favorably by the currency market.
With inflation soaring and global interest rates rising, however, government borrowing costs in the form of bond yields surged again in the United Kingdom, the United States, and Europe.
Neil Wilson, an analyst at Markets.com, remarked, “I have rarely witnessed sentiment this negative.”
“We’re doomed” appears to be the prevalent sentiment.
We have not witnessed bond markets in this condition for years. The stock market is hanging near two-year lows and the dollar is destroying everything in its way.
Allies of Ms. Truss have urged the premier to remain steadfast despite the turmoil on the financial markets, while maintaining that she and Mr. Kwarteng must improve their communication with voters and markets.
The OBR has stated that it offered to deliver budget-time preliminary predictions a week ago, but was rejected.
The Chancellor’s tax cuts and energy bill bailout sparked concerns that the United Kingdom’s borrowing could spiral out of hand, but it now appears that ministers will curb expenditure.
It is possible that benefits would not be increased in tandem with soaring inflation as had been anticipated.
During a series of interviews conducted this morning, City minister Andrew Griffith told Sky News: ‘I think it’s a great idea that the Prime Minister and Chancellor are meeting with the independent OBR – much like the independent Bank of England, they play a crucial role.
“We all want the projections to be as rapid as possible, but as a former finance director, I also understand that you want them to be sufficiently detailed.”
In response to claims that the OBR might have produced a prediction in time for the mini-budget, Mr. Griffith stated, ‘This estimate would not have included the growth measures in the plan. They were being finalized in the hours preceding the Chancellor’s appearance.