Sterling falls below $1.11 after new economic reforms

The British pound reached its lowest level since July 1, 2020.

Matt Cardi | Getty Images

The beleaguered British pound fell more than 2% against the dollar on Friday, after the new British government announced a radical economic plan in a bid to boost growth.

Sterling fell to $1.1029 at 12:20 pm London time, two hours after the measures were revealed in the House of Commons.

Sterling has been in sharp decline against the dollar this year, this month reaching levels not seen since 1985. Friday’s measures were described by the government as heralding a new era for the UK focused on growth, and included a mix of tax cuts and investment incentives for businesses.

The Bank of England said on Thursday that the British economy is likely to be already in a recession as it raised interest rates by 50 basis points.

Investors have dumped British bonds amid an expected rise in government debt. Paul Johnson, director of the Institute for Fiscal Studies, said markets looked “terrified” at the scale of the “financial giveaway” and said they represented the highest level of tax cuts in half a century.

Britain’s two-year government bond yields rose by the highest daily amount since Friday, Reuters reported, and 10-year bond yields saw their biggest daily rise since 1998. Yields move inversely with prices.

UK stock markets also fell, with the FTSE 100 index hitting its lowest level since March.

Jane Foley, chief FX strategist at Dutch bank Rabobank, said the market appeared skeptical of the government’s 2.5% growth target, even though the measures were “unabashedly designed to boost demand”.

“The clear meaning is that BOE rates are likely to be higher for a longer period than they otherwise would. While the textbooks suggest that higher short-term interest rates should be supportive of currencies, sterling has shown since the spring that this is not always the case.
She said in a note.

Foley said that with the UK at a record debt-to-GDP ratio, sterling was vulnerable to a downward revision if foreign investors were reluctant to fund the deficit. And “the markets are clearly very skeptical about this government’s ability to manage debt.”

The euro was also lower against the dollar on Friday morning, falling 0.8% on the day to $0.976 after a statement showed that the euro zone PMI fell to 48.2 in September. Standard & Poor’s Global said that means the bloc is likely to enter a recession.

The dollar has strengthened this year due to stock market volatility and higher interest rates at the Federal Reserve.

This is a breaking news story, please check back later for more information.

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