Monthly Wrap: GBP – Pound collapses as UK government’s mini-budget rattles markets

Key takeaways:

• Pound crashes amid UK fiscal policy concerns.
• BoE intervention helps to stem rout.
• GBP Monthly lows: €1.08, $1.04, AU$1.60, NZ$1.83, C$1.42
• GBP Monthly highs: €1.17, $1.17, AU$1.72, NZ$1.93, C$1.53

The pound faced a very trying month in September, with the currency plunging to a new record low against the US dollar amidst considerable concern over UK fiscal policy.

This was triggered by the unveiling of Chancellor Kwasi Kwarteng’s mini-budget. Kwarteng announced the plans for sweeping tax cuts worth up to £45bn to be funded through increased borrowing.

Analysts warned that the tax cuts could stoke inflation, while ballooning public debt to unsustainable levels, in addition to being counterproductive to the Bank of England’s (BoE) attempts to tighten monetary policy.

Concerns over the budget triggered a rout in the pound, with the GBP/USD exchange rate falling as much as 7% in the fallout.

A subsequent intervention from the BoE into the bond market helped Sterling to rebound from its worst levels, but trade in the pound remains highly volatile.

Even ahead of the Sterling crisis triggered by the mini-budget announce, it’s clear the pound was on a downward trajectory in September. With GBP exchange rates stumbling amid signs of a UK recession in addition a disappointing 50bps interest rate hike from the BoE.

Looking ahead, it’s a highly uncertain time for the pound, as concerns over UK fiscal policy continue to mount.

Without some sort of U-turn from the UK government regarding its tax cuts or at least more clarity on its spending and borrowing plans, the pound is likely to remain vulnerable to more losses.

This leaves a very real risk that the GBP/USD exchange rate could hit parity. 

Such a swing could force the BoE to make an emergency interest rate hike, which would likely help to shore up the pound in the short-term.

Either way, it seems safe to assume that any near-term movement in the pound is likely to be highly volatile.