The British pound hit its lowest level since July 1, 2020.
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The pound fell to $1.1029 at 12:20 p.m. London time, hours after the measures were unveiled in the House of Commons.
The pound has seen a precipitous fall against the greenback this year, reaching levels this month not seen since 1985. Friday’s measures were touted by the government as heralding a new era for the growth-focused UK , and included a mix of tax cuts and investment incentives for businesses.
The Bank of England said on Thursday that Britain’s economy was likely already in recession as it raised interest rates by 50 basis points.
Investors dumped UK bonds amid an expected rise in government debt. Paul Johnson, director of the Institute for Fiscal Studies, said markets appeared “frightened” by the scale of the “tax giveaway”, and said it represented the highest level of tax cuts in one half century.
Yields on 2-year British government bonds rose by the highest daily amount since 2009 on Friday, Reuters reported, and 10-year yields saw their biggest daily rise since 1998. Yields move in the opposite direction prices.
UK stock markets also fell, with the FTSE 100 hitting its lowest level since March.
Jane Foley, senior FX strategist at Dutch bank Rabobank, said the market appeared skeptical of the government’s 2.5% growth target, although the measures were “unapologetically designed to stimulate demand”.
“The obvious implication is that BOE rates are likely to be higher for longer than they otherwise would have been. While the textbooks suggest higher short-term interest rates should support the currency, the GBP has shown since the spring that this is not always the case.
case,” she said in a note.
With the UK hitting a record debt-to-GDP ratio, the pound is vulnerable to a downgrade if foreign investors are reluctant to finance the deficit, Foley said; and “the markets clearly doubt the ability of this government to manage the debt”.
The euro was also down against the dollar on Friday morning, down 0.8% on the day to $0.976 after a statement showed the Eurozone Purchasing Managers’ Index fell to 48.2 in September. S&P Global said this meant the bloc was likely to enter a recession.
The dollar has been boosted this year by equity market volatility and Federal Reserve interest the rate increases.
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