Traders, analysts and politicians looking for a soothing balm had been surprised on Sunday to hear Kwarteng’s commitment “more is to come.” Sterling dropped further and then, while the UK was sleeping, its currency tumbled in Asian markets — to £1.03 to the dollar, something former Treasury officials I know didn't think they’d ever see.
And so, even though the pound pared its losses slightly, the Bank of England came under huge pressure to do something. Anything.
A likely whopping 100 basis-point hike in November was already priced in. By Monday this climbed to 200 basis-points — four times the size of its last hike — and a call for an extraordinary extra session hastily arranged for this week. By lunchtime, there was a rumour of a BOE statement within hours, possibly including a extra bonus rate hike.
In the end this didn’t materialise and all we got was the emollient tweet featured at the top of this email. Most agree the Bank will raise rates again — hammering household mortgage repayments in a period already billed as the worst winter in living memory (something former minister Jim O’Neill weighed in on today, calling the Budget “naive.”)
The Pound is accelerating lower so it is reasonable to question when it will find a sustainable low. The tail on today’s candle suggests a low of at least near-term significance so we may get some steadier action. However, the question of how the downtrend will eventually end is unanswered.
The Bank of England is now in an exceptionally difficult position. Gilt yields are shooting higher. The 2-year is at 4.57% and there is no sign of support being found. Since the base rate is only 2.25%, that’s pricing in a lot of additional hikes.
The challenge for the Pound is the higher rates go, the more impact they will have on consumer spending because of the number of people with floating rate and short fixed-term mortgages. That implies a deep recession with falling government revenues. The easing of regulations is to be welcomed and will support a recovery but is unlikely to avoid a recession.
That suggests the Pound has further room to fall despite short-term scope for steadier action.
Gold in Pounds surged to test the March peak but pulled back when the Pound rebounded. That suggests scope for some additional consolidation in the near term.Back to top