Zhitong Finance APP noticed that the policy-induced pound sell-off showed almost no sign of weakening as the market entered a new week, putting pressure on the newly appointed British Prime Minister Trass government.
The UK Tras government announced its most radical tax cut since 1972 on Friday, reducing taxes on workers’ wages and businesses to boost the soon-to-be-recessioned British economy.
As Asian forex trading restarted on Monday, the troubled pound fell to a 37-year low against the dollar. If the pound continues to fall this week, the UK government could move from a short-term embarrassment to a deeper crisis, forcing the government to respond quickly.
UK Chancellor Kwoten announced the cancellation of the highest income tax and lowered the base tax rate by a percentage point, while reversing the National Insurance Payroll Tax hike that began earlier this year. Last Sunday, he seemed calm about the fierce reaction that caused the UK assets to plummet, and told the media that he would not comment on the market trend, but there would be more moves in terms of tax cuts. "I hope to see that people will retain more income in the coming year because I believe the British people will drive the economy."
As the pound fell 0.9% to below $1.08 on Sunday night, the opening of the Phnom Penh market at 8 a.m. on Monday will also be worth watching. Yields on UK government bonds soared, reaching record levels in some maturities as investors punished the Chancellor for unapologetically pursuing growth.
If maintained, the change in yield will greatly increase the cost of an additional £400 billion (US$434 billion) of borrowing, and the already inflated interest bill will be further increased due to high inflation and the Bank of England rate hike.
pound pound against the dollar once hit its worst day since its record plunge after the 2016 Brexit referendum, showing the historic severity of last Friday's sell-off. Ultimately, the 3.6% drop last Friday was the seventh worst in the past 50 years.
Goldman Sachs analyst Kamakshya Trivedi wrote on Friday: "The pound may weaken further as widespread financial expenditures cannot offset the inflation impulse through monetary policy."
market trends this week could have a huge impact. Opposition Labour has already taken the lead in the polls - is seeking to capitalize on the policy gap opened with the Conservative Party at the annual meeting that began on Sunday at Liverpool . Labor leader Kil Stamer said on Sunday that he would overturn Kwoten's most eye-catching measure - removing the highest 45% income tax rate on incomes of more than £150,000.
If the pound falls to 1:1 against the dollar, Tras will face opposition from the Conservative backbenchers. Meanwhile, some market participants are already calling on the Bank of England to take urgent action to curb the trend, an unprecedented action in modern history that could increase panic.
Former Bank of England official Adam Posen said on Twitter that he expected Bank of England Governor Andrew Bailey to "speak publicly in the middle of the week that if the pound falls, it will raise interest rates."
After Kwoten's speech on Friday, traders expected the Bank of England to raise interest rates by 120 basis points at its November 3 meeting, more than double the rate hike announced last Thursday. Trevor Pugh, head of brokerage and agency at the Phnom Penh bond dealer at
Tradition Ltd., said traders are now also considering the possibility that the swap market will rise during the meeting.
If the weekend's closing brings some peace to the market and the market trend begins to fall back on Monday, this will buy time for the British government. This will add importance to the Conservative General Assembly next week, which now has the potential to transform from a coronation of the new government into an opportunity to restore already damaged credibility.
But the outlook for many people in the market is far from optimistic. The turmoil last week sparked more forecasts, including former U.S. Treasury Secretary Lawrence Summers, who predicted the pound would fall below 1-1 against the dollar.Bloomberg's option pricing model now shows that the chances of the pound to the U.S. dollar to reach 1 dollar in the next six months are one-quarter, up from 14% on Thursday.
Others expressed concerns about the future of UK debt.
HSBC analysts said, "The UK Treasury market is adjusting to adapt to the huge changes in the fiscal landscape and the huge supply and demand prospects." "At the same time, the Bank of England is also transforming from a buyer of bonds to a seller, and more importantly, other investors are increasingly worried about the UK's fiscal credibility."
