City braces for more volatility after mini-budget rocks pound
City investors are bracing for more volatility after the bonanza of tax cuts and spending measures in Kwasi Kwarteng’s mini-budget threatened to undermine their confidence in the UK.
The odds of the pound hitting parity with the US dollar, for the first time ever, have jumped after sterling slumped below $1.09 on Friday as traders grew increasingly anxious about the UK’s budget and current account deficits.
Chris Weston, the head of research at the brokerage firm Pepperstone, said the pound was “the whipping boy” of the G10 foreign exchange market, while the UK bond market was “getting smoked” thanks to Kwarteng’s £45bn debt-financed tax-cutting package.
“The funding requirement needed to pay for the mini-budget means either we need to see far better growth or higher bond yields to incentive capital inflows,” Weston said. Targets that the pound could fall below $1.05, for the first time ever, were being “liberally thrown around”, he added.
<p lang=«en» dir=«ltr» xml:lang=«en»>After such a dramatic week in markets we look ahead to a huge week of central bank speakers — will risk rally or will markets go after a response as the ability to price risk is so uncertain? A few thoughts on the trading landscape & the big talking points#trading #market #USD pic.twitter.com/vUUUR1ig6bKwarteng’s mini-budget caused a rout in UK financial markets on Friday. Sterling shed four cents to hit a 37-year low of $1.0856, while the jump in the cost of government borrowing was the biggest in a single day in decades.
“The price of easy fiscal policy was laid bare by the market,” said Sanjay Raja, chief UK economist at Deutsche Bank. He said Kwarteng’s tax cuts were adding to medium-term inflationary pressures and were “raising the risk of a
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