The GBP hits historic low reaching parity with the USD
Europe in an economic freefall after Ukrainian-Russo conflict intensifies and energy crisis rise amid political instability
This week the British pound has plummeted in value over the last week as a result of the UK's choice to pursue broad-based tax cuts and other fiscal stimulus measures at a time when inflation remains high.
Over the weekend, the pound plummeted to a historic low versus the US dollar, and Nomura strategists predict the decline to continue until early next year.
Nomura said in a Monday note that it expects the pound to approach parity with the dollar by the end of November and to decline to 0.975 compared to the dollar by the end of the year.
Furthermore, the business anticipates the pound to reach 0.95 to the dollar in the first quarter of next year.
This is a basic balance-of-payments dilemma, and politicians are looking for a quick resolution. Markets are reflecting that hope is not a plan.
In particular, the UK's current account deficit increased to more than 8% of GDP in the first quarter and is anticipated to remain at that level in the second quarter.
In a far worse state given since 1974. The IMF bailed out the UK in 1976 or 1989, when the current account deficit-to-GDP ratio hit troughs of roughly 4-5%, according to Nomura.
Indeed, given the movements in energy prices since June, the business believes the UK's current account deficit might be much worse than 8%.
This is the UK's largest current account deficit in modern history, and unlike in 2020, the Bank of England is not engaging in quantitative easing to absorb the majority of the new issuance.
As a result, the government's addition to the planned issue last week is ineffective.
According to Nomura, the pound has a path to rebound based on three potential triggers. Those three possible triggers, however, do not ensure a quick recovery in the pound, according to the paper.
Emergency rate rises in the face of reduced growth projections and a likely recession will not benefit the pound in the medium term, and there is little evidence that the UK government will be forced to reverse its recent fiscal stimulus program.
Members of the UK Conservative Party have allegedly stated that the central bank may need to raise interest rates in an emergency.
Conservative Party members in the United Kingdom warn the Bank of England may need to raise interest rates on an emergency basis to soothe market fears as the mini-budget pushes the pound to a record low versus the dollar, according to Bloomberg.
According to the article, which cites anonymous sources, lawmakers in the ruling party believe the central bank would make such a step.
During Asian trade on Monday, the pound fell over 5% to $1.0350, its lowest level since 1971, when the United Kingdom moved to a decimal-based currency system.
Since then, the pound has recovered some ground, trading at $1.0855.
The currency began to fall on Friday as the government unveiled its Growth Plan, which aims for a 2.5% trend of economic development and contains proposals for the greatest tax cuts since 1972.
The idea has alarmed investors, who are concerned that it would drive up inflation even more and significantly increase government debt.
The next meeting of the central bank was set on November 3. Since December, policymakers have hiked interest rates seven times in an attempt to keep inflation under 10%.
The most recent rate increase took place last week when the benchmark rate was raised by 50 basis points to 2.25%.
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Under the government of Liz Truss, who was chosen prime minister earlier this month, finance minister Kwasi Kwarteng launched the growth plan.
When you start receiving emergency anything, the political optics are bleak, said one former minister who declined to be named in order to discuss internal party debates with Bloomberg.
An undisclosed politician stated that the mini-budget did not have widespread support among their parliamentary colleagues, including members of the UK's new administration.
According to the source, there has been some debate about voting against the measures, but the concept is not yet popular among Tory members of parliament.
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This article originally appeared in The British pound will fall below the US dollar by year-end unless the UK government forces a U-turn on its latest tax cut plans, Nomura says
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