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The run on the pound

Sterling plunged to an all-time low against the US dollar in Asian trading before paring some losses as confidence in the UK’s fiscal policy went up in smoke. GBPUSD slipped almost 5% to 1.035 in a brutal 20-minute selloff in the early hours, extending its run lower from Friday after the chancellor announced sweeping tax cuts. 

Of course, it’s not entirely sterling and the tax cuts – the euro is also under the cosh and slipped even further overnight as sterling fell. Overnight EURUSD dipped to 0.9550, a new 20-year low, whilst the dollar index rallied above 114 for a new two-decade high. But if we look at euro-sterling, it’s obvious the market is giving the chancellor a thumbs down. Sterling also dropped abruptly against the euro, with EURGBP hitting a two-year high this morning above 0.9250. 

UK assets under pressure

The judgment of the market to the new fiscal policies is obvious enough; the bond vigilantes have returned with a vengeance. Following the initial sell-off we’ve seen cable bounce back to above 1.07 but it’s clear there is no love for the pound. The FTSE 100 was sharply lower on Friday amid broad based selling of stocks, but the softer pound is giving it some respite this morning as European stock markets trade generally lower. The domestically focused FTSE 250 was about 0.7% lower in early as confidence in UK pls evaporates. And there is no let-up in the bond market; gilts are off sharply with the 10yr yield jumping above 4.2%, its highest since 2008, and 2yr north of 4.4%. Very swift and very aggressive repricing in the last two sessions. Ok so markets have a habit of overshooting on the way up and the way down – but gilts and sterling probably have further to go here.

Does the Bank of England intervene? 

Talk is of an emergency interest rate hike by the Bank to steady the ship. Traders now price in 150bps of hikes by the BoE by November, implying an expectation it comes out with a hike before the next meeting. The central bank is in a tough place and any intervention might only be a sticking plaster as the path of least resistance for the pound is lower; parity gravity. Despite this, to not act would be wilful neglect. Just as the chancellor has taken a reckless approach to fiscal policy – a kind of economic vandalism – the BoE needs to take a very considered approach to monetary policy. 

Italy’s new PM

Meloni’s centre-right coalition heads for a comfortable majority in parliament after voting in Italy on Sunday. There has not been a massive reaction in markets to this since polls have been telling us this would happen for some time. The FTSE MIB is firmer this morning, rallying 0.75% in early trade to outperform peers.  

Oil slips

Brent crude fell below $85 a barrel as markets fretted over the global economic outlook and the dollar surged to its highest since 2002. Brent futures fell to their lowest since January, wiping out all the gains made since the Russian invasion of Ukraine.

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