The British pound dips below $1.11 after new economic reforms

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Sterling hit its lowest level since July 1, 2020.

Matt Cardy | Getty Images

They fought British pounds fell 1.95% on Friday against the dollar after the new British government announced a radical economic plan in an attempt to increase growth.

Sterling fell as low as $1.1032 at 12pm London time, a few hours after the measures were unveiled in the House of Commons.

The pound has been on a steep slide against the dollar this year, hitting levels this month not seen since 1985. Friday’s move was billed by the government as ushering in a new era for Britain focused on growth, and included a mix of tax breaks and investment incentives for businesses.

The Bank of England said on Thursday that the British economy was probably already in recession when it raised interest rates by 50 basis points.

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

Yields on 2-year British government bonds rose by the highest daily amount since 2009 on Friday, Reuters reported, and 10-year yields saw their biggest daily increase 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, even though the measures were “unabashedly 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 rates should be currency supportive, since the spring the GBP has demonstrated that this is not always
case,” she said in a note.

With Britain hitting a record debt-to-GDP ratio, the pound is vulnerable to a downside if foreign investors are reluctant to finance the deficit, Foley said; and “markets are clearly very skeptical of this government’s ability to manage debt.”

That Euro had also fallen against the dollar on Friday morning, falling 0.8% on the day to $0.976 after a report showed the eurozone Purchasing Managers’ Index fell to 48.2 in September. S&P Global said that meant the bloc was likely to enter a recession.

The dollar has been strengthened this year by stock market volatility and Federal Reserve interest rates interest rate increases.

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