Pound hits record low after tax cut plans
Business / Mon 26th Sep 2022 am30 06:55am
THE pound has fallen to a record low against the dollar as markets react to the UK’s biggest tax cuts in 50 years reports the BBC.
In early Asia trade, sterling fell close to $1.03 before regaining some ground to stand at about $1.06 on Monday morning, UK time.
Chancellor Kwasi Kwarteng has promised more tax cuts on top of a £45bn package he announced on Friday amid expectations borrowing will surge.
The pound has also been under pressure due to strength of the dollar.
The euro also touched a fresh 20-year-low against the dollar in morning Asia trade amid investor concerns about the risk of recession as winter approaches with no sign of an end to the energy crisis or the war in Ukraine.
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Look at that cliff edge on the graph. Fantasy economics at their most destructive.
Much of the fall is an expected response to the measures, such as to make it a self-fulfilling prophecy, which the Chancellor would have anticipated. Currency traders and funds have shorted (sold) Sterling pushing it down in the expectation of buying back at a cheaper price to cover their position, profiting short-term from the price difference. It follows the old adage: ‘Sell on the rumour; buy on the fact’. They will be compelled to enter the markets to purchase Sterling as cover..hence the partial recovery in price. This is normal market practice and should be taken as such. What really counts is if the fiscal stimulus does result in growth, inward investment and higher exports. More time is needed for that to be judged. If international energy prices continue to fall or are lower than Treasury forecasts, then borrowing for the energy relief will be lower, helping both inflationary pressures and Sterling. Let us not forget that the Euro is also at a 20 year low against the US dollar and EU inflation is also at record levels. This is not limited to the UK.