In response to the newly elected government’s signals that it will pursue more aggressive tax cuts along with subsidies to households and businesses, the British pound plummeted to an all-time low against the U.S. dollar early Monday morning. During the opening of Asian markets on Monday morning, the pound fell slightly below $1.035, its lowest level since 1971, when the British currency was converted to decimal units.
Markets have reacted to the UK’s largest tax cuts in 50 years, with the pound falling to a record low against the dollar. On Monday morning, UK time, sterling fell just below $1.04 before regaining some ground to stand around $1.05 early in Asia trade#BritishPound #dollar #Pound pic.twitter.com/YX3GO9uTiT
— Live News Now (@LiveNewsNow6) September 26, 2022
Forex tracker XE indicates that the currency has recovered slightly and is trading just above the $1.067 mark at 08:00 a.m. British Standard Time. Also, the British pound fell against the Euro by more than 3.7%, falling as low as €1.08 before recovering and reaching €1.10. Bloomberg projects that the volatile pound will reach parity with the United States dollar by 26 percent in the next six months.
As the U.S. dollar soared to a 20-year high last month, the Dollar Index, which measures the American currency against six other major currencies, has risen by 4.64% in the previous thirty days to 113.75. During a BBC interview on Sunday, Kwasi Kwarteng, the U.K.’s finance minister, said: “There will be more tax cuts in the months to come.” He added that he hopes to see people retain a significant portion of their income the following year. He believes the British people will drive this economy.
As part of a “mini-budget” presented by the British government, led by newly-elected Prime Minister Liz Truss, a tax cut package worth £45 billion ($48 billion) was announced on Friday. To implement the proposed cuts, Kwarteng removed a 45% additional tax rate for those earning more than £150,000 a year ($161,000). However, it led to strong criticism from the Opposition Labour Party.
In addition to the steep tax reductions, the British government is also heavily subsidizing households and businesses with high energy costs resulting from Russia’s war in Ukraine. As a result, there is a concern that the U.K. government will have to borrow tens of billions of pounds at high-interest rates to offset the massive tax cuts and public expenditures, a development that has frightened the markets.
Why is it essential to keep an eye on the falling pound?
Thousands of foreign exchange transactions take place every day between investors throughout the world. It is also determined by market rates at which investors exchange currencies that people receive at the post office, bank, or foreign exchange. People often do not consider exchange rates until they are required to exchange money for a foreign holiday. A lower exchange rate between the pound and the local currency will result in higher prices when traveling abroad. As a result of a drop in the pound, household finances are also affected.
Importing goods from overseas becomes more expensive if the pound is worth less. A weak pound, for instance, can increase the price of filling up your vehicle with petrol since oil is priced in dollars. In addition to gasoline, gas prices are also expressed in dollars. Purchasing technology products produced abroad, such as iPhones, may result in higher prices in UK shops. It is possible to get much more expensive even if you manufacture items in the UK using parts from abroad.
During a recent interview with a former deputy governor of the Bank of England, he expressed concerns about the possibility of raising interest rates before the Bank’s November meeting. The statement made by Gieve is that “I am sure they do not wish to do that… since it would be considered a sign of pressure.” During a “mini-budget” to boost economic growth on Friday, Kwarteng announced a significant shake-up of taxes to boost growth. He said there was “more to come” regarding tax cuts.