Traders are betting on an emergency rate hike after the pound hit a record low

Sterling fell to a record low on Monday, raising expectations of an emergency hike in UK interest rates in the wake of Chancellor Kwasi Quarting’s tax cut package last week.

The coin lost as much as 4.7 percent to trade as low as $1,035 early in the morning before settling around $1.07. The turmoil came after Kwarteng pledged at the weekend to double his campaign to cut taxes, prompting warnings that the United Kingdom was entering a currency crisis.

The early drop in sterling sent the pound to its lowest level since the current system of floating currencies began in 1971. It sharpened criticism of Friday’s financial statement, when the chancellor announced a massive new wave of borrowing to fund the £45 billion tax cuts and package . To reduce high energy bills.

“The UK is now in the midst of a currency crisis,” said Vasilios Gekionakis, Citigroup’s head of foreign exchange strategy.

The losses were not only in the pound sterling against the dollar. Sterling also fell 3.7 percent against the euro on Monday to €1.0787, hitting its lowest level since September 2020.

Traders upped their bets on an emergency rate hike ahead of the Bank of England’s next meeting in November. Derivatives markets are pricing in a rise of more than 0.5 percentage point within a week and a gain of nearly 1.5 percentage point by the November meeting.

The central bank declined to comment on whether it plans to hold an emergency interest rate meeting this week.

The Treasury Department on Monday did not comment on market movements. Quarting told the Financial Times in an interview last week, “I am always calm. Markets are moving all the time. It is very important to remain calm and focus on the long-term strategy.”

The UK lacks the resources, and perhaps also the will, to attempt direct intervention in the currency markets to prop up the pound, unlike their counterparts in Japan, which intervened last week. However, the BoE’s Monetary Policy Committee met outside the regular session when markets were turbulent in the past in an attempt to restore calm, usually by cutting interest rates. Since gaining independence in 1997, the Bank of England has never raised rates between scheduled meetings.

“If I am still at the BoE, I will be inclined to announce an additional meeting in a week,” said Sushil Wadhwani, asset manager and former policy maker at the Bank of England.

British government debt continued to fall on Monday after Friday’s massive sell-off, the worst day for the gold market since the early 1990s.

The yield on the 10-year Treasury, which is rising as prices fall, rose 0.23 percentage point to 4.06 percent, up from about 3.5 percent before Friday’s financial announcement. Sterling weakened to its lowest level since 1985 on Friday, below $1.09 – the level at which it fell on Monday.

The Westminster tax cuts come as the UK is already expected to spend £150 billion to support energy costs for consumers and businesses. Much of this borrowing will be financed through gold bonds.

In contrast to the massive tax cuts of the 1980s, Kwarteng is borrowing tens of billions of pounds to fund his plans, boosting demand as the Bank of England raises rates to control inflation.

“We seem to be headed toward a downward spiral that we normally see in emerging market crises, as policy makers struggle to reassert their credibility,” said Mansoor Mohieldin, chief economist at Bank of Singapore.

Muhyiddin said investor confidence in the pound has been undermined by expectations that UK public debt is now on an “unsustainable upward trajectory” while the country continues to run “large current account deficits”.

“If we continue to see these huge market moves, the Bank of England will have to raise interest rates, perhaps as much as one percentage point, to try to stabilize the pound,” he added.

The Bank of England raised interest rates by 0.5 percentage point on Thursday, following a 0.75 percentage point increase for the third time in a row by the US Federal Reserve the day before.

“We have argued that the way forward for sterling will depend largely on the monetary response to near-term inflation and well-targeted fiscal measures, but so far delivery has been less than encouraging on both fronts,” said FX analysts. Goldman Sachs.

“With massive unfunded spending on the fiscal side unmatched by monetary policy to offset the inflationary impulse, the currency is likely to weaken further.”

Additional reporting by Adam Samson In New York and Leo Lewis in Tokyo

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