British pound plunges below $1.11 after new economic reforms

Sterling hit its lowest level since July. 1, 2020.

Matt Cardy | Getty Images

The embattled British pound fell 1.95% Friday against the dollar, after the new UK government announced a radical economic plan in a bid to boost growth.

Sterling dipped as low as $1.1032 at 12:00 pm London time, a couple of hours after the measures were unveiled in the House of Commons.

The pound has been on a precipitous fall against the greenback this year, hitting levels this month not seen since 1985. Friday’s measures were billed 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 Thursday that the UK economy was likely already in a recession as it raised interest rates by 50 basis points.

Investors ditched UK bonds amid a rise in expected government debt. Paul Johnson, director of the Institute for Fiscal Studies, said markets appeared “spooked” by the scale of the “fiscal giveaway”.

Yields on 2-year UK government bonds rose by the highest daily amount since 2009 Friday, Reuters reported, and 10-year yields saw their biggest daily rise since 1998. Yields move inversely to prices.

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

“The obvious implication is that BOE rates are likely to be higher for longer than they would have been otherwise. While textbooks suggest that higher short-term interest rates should be currency supportive, GBP has been demonstrating since the spring that this is not always the
case,” she said in a note.

With the UK hitting a record debt-to-GDP ratio, the pound is vulnerable to a downward revision if foreign investors are reluctant to fund the deficit, Foley said; and “markets are clearly very doubtful of the ability of this government to manage debt.”

The euro was also down against the dollar Friday morning, falling 0.8% on the day to $0.976 after a release showed the euro zone’s Purchasing Managers’ Index fell to 48.2 in September. S&P Global said it meant the bloc was likely to enter a recession.

The dollar has been boosted this year by equity market volatility and Federal Reserve interest rate rises.

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

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