Markets hate Liz Truss’ plan for Britain. Just look at these charts

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The British pound plunged below $1.10 by mid-afternoon, hitting a new 37-year low against the greenback.

British government bonds also sold off sharply. The yield on the benchmark 10-year UK government bond, which moves against rates, jumped by a quarter of a percentage point – a very big step in the world of bond trading. That pushed borrowing costs up. UK stocks, measured by FTSE 100 (UKX) in London, hit their lowest level since March.

Finance Minister Kwasi Kwarteng said the government would cut personal income tax and cancel plans to raise business taxes next spring, calling for a “new approach to a new era, focused on growth.” At the same time, he promised to press ahead with plans to subsidize the energy bills of millions of households and businesses.

But investors are not convinced that the unconventional approach will actually help the economy, which the Bank of England warned this week was already likely to be in recession. A number of them called it a huge investment.

“It is highly unusual for a developed market currency to weaken at the same time as interest rates rise sharply. But that is exactly what has happened since [Kwarteng’s] announcement,” Deutsche Bank strategist George Saravelos said in a note to clients on Friday.

Towards parity with the dollar?

One concern is that it will require a significant increase in government borrowing at a time when interest rates are rising rapidly. The Bank of England on Thursday pushed its key interest rate to its highest level since 2008. It was the central bank’s seventh rate hike since December.

Lowering taxes, while politically popular, can also boost demand and push up prices, making the central bank’s task of bringing inflation under control even more difficult.

Former US Treasury Secretary Larry Summers, speaking to Bloomberg Television, said the pound could even fall below parity against the dollar for the first time in its history. (Its previous all-time low was just over $1.05 in 1985).

“It makes me very sad to say, but I think the UK is behaving a bit like an emerging market that is turning itself into an underwater market,” Summers said. “Between Brexit, how far the Bank of England got behind the curve and now these fiscal policies, I think Britain will be remembered for running the worst macroeconomic policies of any major country for a long time.”

The dollar’s breakneck rally as the Federal Reserve takes aggressive steps to curb inflation is adding to downward pressure on the British currency.

“Unless something can be done to address these fiscal concerns, or the economy shows some surprisingly strong growth data, it looks like investors will continue to fire sterling,” Antoine Bouvet and Chris Turner at ING said in a research note. “We think the market may be underpricing the chances of parity.”

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