Pound stays stable as Asian markets open after currency nosedived TWICE yesterday

The Pound has remained stable as Asian markets have opened after twice nosediving yesterday – as Tory backbenchers blame Liz Truss’ mini-Budget after a shock poll found Labour is surging over the Conservatives.

Experts have warned that the Bank of England may be forced into hiking interest rates within the next two days after failing to calm panicked markets as the Pound tumbled yesterday – deepening fears the base rate could hit six per cent next year.

But stocks in Tokyo stocks opened higher on this morning as investors bargain hunt following the sharp falls in the previous session that led to fears over an economic slowdown.

It comes as Tory MPs are said to be furious with Ms Truss and Chancellor Kwasi Kwarteng after the pound plummeted, with some discussing another leadership contest, while others are frightened that such a move would lead to an early general election.

Backbenchers, many of whom backed Rishi Sunak, have expressed worry that the new top team has already cost them the next election, The Guardian reports.

Several MPs are also understood to be concerned that speaking out against Ms Truss or her mini-Budget could lead to their whip being removed. 

Meanwhile, Labour has roared to a large poll lead over the Tories – its largest in more than two decades – following Mr Kwarteng’s announcement.

A YouGov poll for The Times today has put Keir Starmer’s party 17 points clear of the Conservatives.

Only nine per cent of those surveyed believe Mr Kwarteng’s economic policies will leave them better off, while the move to lift a cap on bankers’ bonuses was also rejected by 71 per cent. 

It comes after Bank of England Governor Andrew Bailey yesterday issued a statement insisting Threadneedle Street ‘will not hesitate to act’, though did not pull the trigger on an increase that markets had anticipated following Kwasi Kwarteng’s tax-cutting Budget.

But Viraj Patel, a foreign exchange and global macro strategist at Vanda Research, said markets will have been disappointed by the statement, adding that he believes it will last only a day or two before the Bank of England is forced into action.

He tweeted: ‘No action from the BoE based on latest statement… looks like they aren’t doing anything inter-meeting.  This will be a disappointment for $GBP markets. I suspect this statement will last 24-48 hours before something breaks in markets & forces the BoE to act.’

Meanwhile, there are fears that interest rates could reach six per cent – causing mortgage rates to rise at a similar level.

Samuel Tombs, chief economist at Pantheon Macroeconomics, this evening warned that the average UK household’s monthly repayments could soar from £893 to £1,490 – a £597 rise. He said: ‘If mortgage rates rise to 6% – as implied by markets’ current expectations for Bank Rate – the average household refinancing a 2yr fixed rate mortgage in the first half of 2023 will see *monthly* repayments jump to £1,490, from £863. Many simply won’t be able to afford this.

‘So the choice the MPC faces is either to defend sterling and risk a banking crisis, or let it fall further and accept that inflation will remain above target as far as the eye can see. There are no good options, but the latter would be less damaging.’

In other developments: 

• The Bank of England said it was monitoring markets ‘very closely’ and ‘would not hesitate to change interest rates by as much as needed’;
• The Treasury also sought to soothe markets as it announced that it would set out details of how it will balance the books on November 23;
• The mortgage market descended into mayhem as major lenders pulled a swathe of deals amid fears interest rates could hit 6 per cent next year;
• Experts said the weaker pound would benefit British exporters;
• Investment bank Nomura predicted that sterling could fall as low as $0.95 early next year;
• The euro also dropped, touching a fresh 20-year low against the dollar at $0.9528;
• The Chancellor faces a potentially difficult meeting with top UK insurance bosses today amid the market turmoil;
• Sir Keir Starmer will today try to present himself as the new Tony Blair as he claims in a conference speech that Labour is now the party of economic credibility.

On a volatile day of trading, sterling hit a record low against the US dollar in the early hours of yesterday morning.

The pound also fell against other currencies before rallying and clawing back most of its losses. The turmoil led to the Bank of England issuing a statement saying it would ‘not hesitate’ to hike interest rates if necessary to get inflation under control. The pound’s fall raised fears of large interest rate rises and led to many banks pulling mortgage deals.

Labour and economists critical of the Government’s plans sought to blame Chancellor Kwasi Kwarteng’s mini-Budget on Friday for sparking the turbulence, claiming the markets had taken fright at unfunded tax cuts. 

Tory MPs also pointed the finger at speculators betting against Britain by shorting the pound – gambling it will fall in value and hand them huge profits. They urged jittery colleagues to maintain calm heads and keep faith in Liz Truss’s strategy to boost growth by cutting taxes to stimulate the economy.

Among the short sellers to have cashed in yesterday was Edouard de Langlade, a Swiss-based hedge fund boss. London-based BlueBay Asset Management, which controls £105billion in assets, has also bet against the pound.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘Given the scale of sterling’s rapid descent the hedge fund managers who bet against the pound will have walked away with some eye-watering profits.’

Sterling’s fall to $1.0386 put it at its lowest level since the dollar was launched by the United States in the 18th century. It prompted speculation that the Bank of England might need to intervene. The pound later rallied before slipping back to around $1.07 as expectations of an emergency rate rise faded, but it remained above its overnight lows.

Sterling and UK bonds have become the target of investors betting that they will slump.

Last Friday’s huge tax cuts in the mini-Budget saw those bets accelerate as the pound fell to a new 37-year low just above $1.08.

The further weekend sell-off prompted some to call for the Bank of England to impose an emergency interest rate hike to try to halt the turmoil, although others said that would only fuel panic.

In the end Bank officials simply issued a statement designed to reassure the markets in the afternoon, which was co-ordinated with a Treasury statement.

Mr de Langlade, founder of hedge fund EDL Capital, had been betting on a fall in sterling and took profits overnight as it weakened.

He said yesterday that he had retained some of his bets against the currency and was now also betting against UK stocks in the expectation that they will be hit by surging interest rates.

BlueBay Asset Management’s chief investment officer Mark Dowding told Bloomberg that sterling was the largest currency short it had held this year. ‘We are not changing this view and think that a move toward parity is likely,’ he said.

The ground was clawed back by early afternoon, returning to just over $1.08. However, that was partly due to expectations of an emergency 0.75 percentage point interest rate hike.

When it did not materialise this evening the currency quickly went back down to $1.06. 

Wall Street stocks fell again Monday as recession fears brought volatility to financial markets, pushing the pound to an all-time low against the greenback and pressuring oil prices.

After last week’s rout, US indices climbed early in the session before tumbling back into the red.

Both the Dow and S&P 500 dropped more than one percent to finish at their lowest value of the year. The Dow also entered a ‘bear market,’ defined as a 20 percent retreat from its last record.

London shares closed flat, paring earlier losses after the pound hit a record low against the dollar on surging fears about the ailing UK economy, before recovering ground.

‘Investors are reacting to a really toxic brew of bad news that was made worse by what happened in the UK on Friday, which was the stimulus spending into an already bigger inflationary problem,’ said Andy Kapyrin, co-chief investment officer at RegentAtlantic.

‘I’m not sure that we’ve seen the bottom here,’ Kapyrin said. ‘But I think it does make sense for investors to dip their toe into the water, the stock market is materially cheaper than it started the year.’

Having extended losses in morning trading, Frankfurt and Paris edged higher by mid-afternoon, only to close the session in the red.

The pound on Monday struck an all-time low at $1.0350, days after new UK finance minister Kwasi Kwarteng’s inflation-fighting budget.

The Bank of England said it was paying close attention to financial markets and would ‘not hesitate to change interest rates by as much as needed’ to curb inflation.

Economists expressed concerns that last week’s huge tax-cutting budget from the government of new Prime Minister Liz Truss – aimed at helping the recession-threatened economy – could actually spark massive borrowing and further fuel inflation.

Sterling has struggled in recent years as the UK fails to strike major trade deals following its exit from the European Union.

Prior to Monday’s crash, the pound suffered a series of 37-year lows against the greenback this month on UK recession fears propelled by sky-high inflation.

The euro has additionally come under heavy selling pressure against the dollar in recent months, as the Federal Reserve hikes interest rates more aggressively than the European Central Bank.

The euro struck a new 20-year low at $0.9554 on Monday before recovering.

A day after Eurosceptic populists swept to victory in Italy’s general election, the interest rates on 10-year government bonds hit their highest level for around a decade in France, Germany and Italy.

But the Italian stock market closed higher as markets assessed the future political landscape.

‘Time will tell how successful the new government will prove to be but the prospect of some political stability appears to be generating a small relief rally today,’ said Craig Erlam, analyst at trading platform OANDA.

Elsewhere, oil prices pulled back, with US benchmark West Texas intermediate ending at its lowest level since January, as the strong dollar weighed on the commodity, along with worries over petroleum demand.

Because many key commodities are priced in dollars, a weak pound drives inflation up further. Markets are now pricing in the headline interest rate reaching 6 per cent by next year, heaping more misery on families.

The cost of government borrowing also rose to the highest rate in a decade – causing another headache for Mr Kwarteng as he is using extra debt to fund tax cuts and the energy bills bailout.

However, he is refusing to change course, after insisting only yesterday that there are more tax cuts in the pipeline. 

Mr Kwarteng refused to comment on currency moves as he was doorstepped in Westminster, and before the Treasury statement this evening Downing Street had insisted there were no plans for him or Liz Truss to reasssure the markets. 

Mr Bailey said in his separate statement: ‘The Bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets.

‘In recent weeks, the Government has made a number of important announcements. The Government’s Energy Price Guarantee will reduce the near-term peak in inflation. Last Friday the Government announced its Growth Plan, on which the Chancellor has provided further detail in his statement today.

‘I welcome the Government’s commitment to sustainable economic growth, and to the role of the Office for Budget Responsibility in its assessment of prospects for the economy and public finances.

‘The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term. As the MPC has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government’s announcements, and the fall in sterling, and act accordingly.

‘The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2 per cent target sustainably in the medium term, in line with its remit.’

Allies have been blaming ‘City boys playing fast and loose with the economy’ for the chaos. ‘It was bound to happen. It will settle,’ one told the Times overnight.

Former Cabinet minister John Redwood told MailOnline that traders were ‘trying to make money out of bad news’ and both the Bank and government should ‘completely ignore’ the shifts.      

‘You should completely ignore it if you’re the government or Bank of England. These are extremely volatile markets with some very large players clearly running very big bear positions, and other players coming in to take them on,’ he said.

‘There are big players trying to make money out of bad news… if the Pound gets too cheap people should go and buy it, simple as that.’

However, Labour accused the government of putting the UK on the ‘highway to hell’.

And there are signs of Tory disquiet, with former chancellor George Osborne warning that it is ‘schizophrenic’ to try and have ‘small-state taxes and big-state spending’.

Treasury committee chairman Mel Stride swiped at Mr Kwarteng for insisting yesterday that there are more tax cuts to come on top of the huge £45billion package announced on Friday.

‘One thing is for sure – it would be wise to take stock of how, through time, the markets weigh up recent economic announcements, rather than immediately signalling more of the same in the near term,’ the Tory MP said. 

The weak pound spells huge trouble for UK businesses, which face increasingly higher costs of importing goods from abroad.  

The FTSE 100 typically rises when the Pound falls, as many of the companies are valued in Pounds but make revenue in dollars. However, the index dipped 50 points this morning, temporarily sinking below the psychologically important 7,000 level, before ending the day down 16 points.

The Bank increased rates by another half percentage point to 2.25 per cent only last Thursday.

However, financial markets are speculating that it may act with another before its next scheduled meeting in November, which would also impact household mortgage borrowing.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘Comments by Chancellor Kwasi Kwarteng that he will go even further with historic tax cuts, which are already being criticised as reckless, have added to the anxiety.

‘The worry is that not only will borrowing balloon to eye-watering levels, but that the fires of inflation will be fanned further by this tax giveaway, which offers higher earners the bigger tax break.’

The pound’s tumble has made it more expensive to import goods and commodities, such as food, clothes, oil and gas.

It is also seeing the cost of UK borrowing surge higher – last week rising by the most in a single day for at least a decade after the mini-budget as it impacted government bonds.

‘There is now a tense stand-off between the Bank of England and the Treasury, with policymakers determined to try to bring down inflation by dampening down demand, while politicians are focused intently on trying to boost demand and promote their growth agenda,’ said Ms Streeter.

Gerard Lyons, chief economic strategist at Netwealth, who has been an external adviser and staunch supporter of Liz Truss, said there was ‘clearly a need now’ to ‘address head-on those market worries’.

He told BBC Radio 4’s World at One programme: ‘What it suggests is that on Friday the Chancellor failed to address the market worries.

‘The Chancellor probably could have done more work ahead of Friday to keep the markets onside and there’s clearly a need now, as we’ve seen from the market reaction, to address head-on those market worries.’

He added: ‘The response to this in my mind has to be for the Chancellor to address head-on those market concerns that his strategy is not a dash for growth … but is about pro-growth, building the supply side, and he also needs to address the issues about the so-called affordability.’

Mr Kwarteng’s mini-Budget saw gilts suffer their heaviest selling in three decades on Friday and this morning the pound plunged to its lowest as investors reckon planned tax cuts will stretch government finances to the limit because of the increased cost of borrowing. 

He refused to comment on the markets on TV yesterday, but said on Friday: ‘I’m always calm… markets move all the time. It’s very important to keep calm and focus on longer term strategy’.

Sir John Redwood insisted today that there was no reason to change tack on the Budget measures. 

‘These markets are all very stressed…. every now and then they attack Sterling. They attack other things as welll – they have had a good go at the Yen,’ he said.

‘Markets will do what markets want to do, and there is no point in interfering.’  

Sir John added: ‘I see nothing that has changed in the last two or three days to change the Budget judgment.’ 

This morning sterling tumbled as low as $1.0327, an all-time nadir, and also fell against other global currencies after new finance minister Kwarteng unveiled historic tax cuts funded by huge increases in borrowing.

Sir John Gieve, former deputy governor of the Bank of England, said he would be worried if he was still in the job as sterling falls against the dollar. He predicted the rate rise predicted in two months time could be brought forward.

He told BBC Radio 4’s Today programme: ‘I think I would be worried. The bank, and indeed the Government, have indicated that they are going to take their next decision in November and publish forecasts and, so on that point, the worry is that they may have to take action a bit sooner than that.’

George Godber, Fund Manager of Polar Capital told the BBC: ‘A little bit of it can be explained by continued dollar strength.

‘But specifically the moves on the pound is in reaction to the budget announced on Friday. This wasn’t supposed to be a budget, it was supposed to be a fiscal statement. There was no process, no due diligence, no use of the OBR, quite a slapdash approach to it. The Bank of England could have to massively hike rates to protect scaring, there are some really scary ones. Rates could go another 2 per cent higher in two years time, to 5.5 per cent.’ 

Shadow chancellor Rachel Reeves said she is ‘incredibly worried’ about the sell-off in the pound as she blamed Chancellor Kwasi Kwarteng’s tax and spending plans.

The Labour MP told Times Radio: ‘I started my career as an economist at the Bank of England and, like everybody else, I’m incredibly worried about what we’ve seen both on Friday with market reactions to the Chancellor’s so-called mini-budget and to the reaction overnight.’

She warned that the fall in the pound’s value will raise the cost of Government debt, meaning ‘more and more of Government spending will go on servicing the debt rather than going on public services, which are on their knees right now’.

Ms Reeves said: ‘The pound is now at an all-time low against the dollar and that is not the same for other currencies, including the euro. So, there’s something going on in the UK and it’s not just dollar strength. There’s a selling-off of the pound and that was on the basis of the Chancellor’s so-called mini-budget on Friday.’

The Government remains focused on delivering its growth package despite the fall in the pound, a minister has said.

Asked by Sky News about the slide, Work and Pensions Secretary Chloe Smith said: ‘I am not going to be able to comment on particular market movements and there are various factors that always go into those.

‘But the Government is absolutely focused on delivering the growth package as we set out, with various ways that we will be helping both businesses and households to move ahead to growth, and, as I say, to greater opportunity.

‘For me in particular in the Work and Pensions department, I want to then be able to help more people into more good and well-paid jobs.’

Asked about the poor polling the Tories were facing, Ms Smith added: ‘I have every confidence that the kind of support that the Conservatives were delighted to have in 2019 will continue to follow Liz Truss and be able to have a Conservative government in the years to come.’

Mr Osborne told the FT: ‘You can’t just borrow your way to a low-tax economy. Fundamentally the schizophrenia has to be resolved. You can’t have small-state taxes and big-state spending.’ 

Paul Davies, chief executive officer at Carlsberg Marston’s Brewing Company, has suggested the fall of the pound may cause a rise in beer prices.

He told BBC Radio 4’s Today programme that the drop was ‘worrying’ for the British beer industry, which imports beer and hops from overseas.

Asked if the value of the pound mattered, he said: ‘Yes it does, many of the hops used in this country are actually imported and a lot of them, particularly for craft brewers, are imported from the States, so changes in currency is actually worrying for industry, for sure, and then of course people drink a lot of imported beers from Europe, and the euro vs the pound is also something we’re watching very closely at the moment.

‘Of course things will rise, I would say as an industry we’re generally using British barley and we’re using a lot of British hops, but of course if you’re drinking double IPA that requires a lot of Citra hop and other hops from the States, and at some point that is going to have to be passed through to both the customer and the consumer if prices are this volatile.’

The euro also touched a fresh 20-year trough to the dollar on simmering recession fears, as the energy crisis extends toward winter amid an escalation in the Ukraine war. A weekend election in Italy was also set to propel a right-wing alliance to a clear majority in parliament.

The dollar built on its recovery against the yen following the shock of last week’s currency intervention by Japanese authorities, as investors returned their focus to the contrast between a hawkish Federal Reserve and the Bank of Japan’s insistence on sticking to massive stimulus.

‘Sterling is getting absolutely hammered,’ said Chris Weston, head of research at Pepperstone.

‘Investors are searching out a response from the Bank of England. They’re saying this is not sustainable, when you’ve got deteriorating growth and a twin deficit.’

The euro slid as low as $0.9528, and last traded down 0.55% at $0.9641.

The dollar added 0.29% to 143.78 yen, continuing its climb back toward Thursday’s 24-year peak of 145.90. It tumbled to 140.31 that same day after Japanese authorities conducted yen-buying intervention for the first time since 1998.

A former top Japanese currency official said Monday that policymakers likely won’t try to defend a certain level, such as the 145 mark, but only conduct any further operations to smooth volatility.

The dollar index was 0.76% higher at 114, and earlier reached 114.58 for the first time since May 2002.

Elsewhere, the risk-sensitive Australian dollar slipped as low as $0.6487 for the first time since May 2020, before last trading 0.1% weaker at $0.6524.

Fellow commodity currency the Canadian dollar reached a fresh trough at C$1.3625 per greenback, its weakest since July 2020.

China’s offshore yuan slid to a new low of 7.1630 per dollar, its weakest level since May 2020.

Other currencies were nursing losses. The Aussie touched $0.6510, its lowest since mid-2020. The yen hovered at 143.47 with worries over possible further intervention keeping it from losses.

Japan intervened in the foreign exchange market on Thursday to buy yen for the first time since 1998.

Oil and gold steadied after drops against the rising dollar last week. Gold hit a more-than two-year low on Friday and bought $1,643 an ounce on Monday. Brent crude futures rose 71 cents to $86.86 a barrel.

It comes after the Bank of England launched another 0.5 percentage point interest rate hike to 2.25% on Thursday and warned the UK could already be in a recession.

The central bank previously projected the economy would grow in the current financial quarter but said it now believes Gross Domestic Product (GDP) will fall by 0.1 per cent, meaning the economy would have seen two consecutive quarters of decline – the technical definition of a recession.

Economists had warned that the Chancellor’s tax-cutting ambitions could put further pressure on the pound, which has also been impacted by strength in the US dollar.

Former Bank of England policy maker Martin Weale cautioned that the new Government’s economic plans will ‘end in tears’ – with a run on the pound in an event similar to what was recorded in 1976.

Economists at ING also warned on Friday that the pound could fall further to 1.10 against the dollar amid difficulties in the gilt market.

Chris Turner, global head of markets at ING, said: ‘Typically looser fiscal and tighter monetary policy is a positive mix for a currency – if it can be confidently funded.

‘Here is the rub – investors have doubts about the UK’s ability to fund this package, hence the gilt underperformance.

‘With the Bank of England committed to reducing its gilt portfolio, the prospect of indigestion in the gilt market is a real one and one which should keep sterling vulnerable.’

Derek Halpenny, head of research at MUFG, warned the pound could fall further over policies that ‘lack credibility and raise concerns over external financing pressures given the budget and current account deficit combined looks to be heading to around 15% of GDP’.

Of the international banks and research consultancies polled by Reuters last week, 55% said there was a high risk confidence in British assets would deteriorate sharply in the coming three months.

Meanwhile, Bank of England policymaker Jonathan Haskel said that the central bank was in a difficult position as the government’s expansionary fiscal policy appeared to place it at odds with the BoE’s efforts to cool inflation

Economists have voiced alarm at the massive borrowing that will be required to cover the hole in the government’s books.

The two year freeze on energy bills for households and businesses announced earlier this month could cost more than £150billion by itself, while the tax cuts could add a further £50billion to the tab.

The respected IFS think-tank suggested it would be the biggest tax move since Nigel Lawson’s 1988 Budget, when Liz Truss’s heroine Margaret Thatcher was PM.

The dangers of ramping up the UK’s £2.4trillion debt mountain while the Ukraine crisis sends inflation soaring have been underlined by the continuing slide in the Pound against the US dollar, reaching a fresh 37-year low of barely 1.11 this morning.

In August and September so far the 10-year yield on government gilts has seen the biggest increase since October and November 1979, emphasising the nervousness of markets about the situation.

However, Ms Truss and Mr Kwarteng argue that ramping up economic activity can make up the difference, pointing to decades of lacklustre productivity improvements.