British pound drops below $1.11 after new economic reforms

Sterling hit its lowest level since July 1, 2020.

Matt Cardy | Getty Images

The controversial British pound fell 1.95% against the dollar on Friday after the new British government announced a radical economic plan to boost growth.

The pound fell to $1.1032 at noon London time, a few hours after the measures were announced in the House of Commons.

The pound has fallen sharply against the dollar this year, reaching levels not seen since 1985 this month. Friday’s measures were heralded by the government as a new era for the UK, focused on growth, and include a mix of tax cuts and investment incentives for businesses.

The Bank of England said on Thursday that the UK economy was likely already in recession as interest rates were raised by 50 basis points.

Investors have dumped UK bonds amid a rise in expected government debt. Paul Johnson, director of the Institute for Fiscal Studies, said markets seemed “shocked” by the magnitude of the “tax giveaway.”

Two-year UK government bond yields rose by their highest daily rate since 2009, Reuters reported Friday, and 10-year yields saw their largest daily gain since 1998. Yields move inversely in prices.

Jane Foley, senior FX strategist at Dutch bank Rabobank, said the market seemed skeptical about the government’s 2.5% growth target, even though the measures were “blatantly designed to boost demand”.

“The obvious implication is that BOE rates are likely to be higher for longer than they otherwise would have been.
case,” she said in a note.

With the UK hitting a record debt-to-GDP ratio, the pound is vulnerable to a downward revision if foreign investors are reluctant to fund the deficit, Foley said; and “Markets are clearly very questionable about this government’s ability to manage debt.”

The euro also fell against the dollar on Friday morning, falling 0.8% on the day to $0.976 after a release showed the euro-zone Purchasing Managers’ Index fell to 48.2 in September. S&P Global said it meant the bloc was likely to enter a recession.

The dollar was boosted this year by stock market volatility and the Federal Reserve’s interest rate hikes.

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