Pound falls to 37-year low against dollar ahead of mini-budget; UK consumer confidence weakest on record – business live | Business

Pound hits 37-year low against dollar as UK ‘ramps up borrowing at a dizzying pace’

Sterling has dropped to a fresh 37-year low against the US dollar – an unwelcome backdrop to Kwasi Kwarteng’s mini-budget this morning.

The pound has fallen below $1.12, the weakest point since 1985, and has now shed 17% against the dollar so far this year.

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitive

The decline is partly due to dollar strength – the greenback is at 20-year highs against a basket of currencies, due to worries about the global economy and the series of large interest rates by the US Federal Reserve.

But it’s also due to concerns about the UK economy as it teeters towards recession.

Investors are anxious that Kwarteng’s mini-budget will drive up borrowing – especially as the Office for Budget Responsibility has not been allowed to provide forecasts for today’s event.

RBC Capital Markets say markets are left to speculate on “who has the appetite for gilts when the BoE is selling and the govt is ramping up borrowing at a dizzying pace”.

They forecast that the pound could fall even lower, to below $1.05 – which would be an all-time low.

For us, it leaves weaker GBP [the pound] as the clearest escape valve to keep financing a large current account deficit.

Our forecast is currently sub-1.05 for GBP/USD. If the Chancellor’s gamble to boost growth fails to pay off, it will leave GBP in an even bigger hole.

Key events

filters BETA

Derek Halpenny, head of research at MUFGsaid in a note he sees risks the pound could fall further over UK government policies that could possibly “lack credibility”.

Halpenny adds that the mini-budget could raise concerns over external financing pressures as “the budget and current account deficit combined looks to be heading to around 15% of GDP.”

Of the international banks and research consultancies polled by Reuters Last week, 55% said there was a high risk confidence in British assets would deteriorate sharply in the coming three months.

Kwasi Kwarteng’s (expected) pledge to “turn the vicious cycle of stagnation into a virtuous cycle of growth” hasn’t sparked much excitement in the City.

The blue-chip FTSE 100 index has lost 0.6% this morning, dropping to its lowest since mid-July.

The smaller FTSE 250 index – which is more domestically-focused – is 0.2% lower. It’s seen as a better barometer for UK trading and prospects – and has shed a fifth of its value so far this year.

Richard J Hunter, head of markets at Interactive Investorsexplains:

The FTSE 250 index has lost 22% so far this year, with the latest 0.5% rate hike from the Bank of England adding to tightening concerns at a time when growth is flat to non-existent.

It is expected that the government will unveil a new “fiscal event” later in a mini-budget which should involve tax cuts and increased spending in an attempt to stimulate growth. It remains to be seen how effective such moves might be, given the wider pressures affecting economies globally.”

This chart shows the pound’s fall towards the record low set in 1985.

The poud vs the US dollar since 1970
The pound vs the U dollar Photograph: Refinitive

Pound hits 37-year low against dollar as UK ‘ramps up borrowing at a dizzying pace’

Sterling has dropped to a fresh 37-year low against the US dollar – an unwelcome backdrop to Kwasi Kwarteng’s mini-budget this morning.

The pound has fallen below $1.12, the weakest point since 1985, and has now shed 17% against the dollar so far this year.

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitive

The decline is partly due to dollar strength – the greenback is at 20-year highs against a basket of currencies, due to worries about the global economy and the series of large interest rates by the US Federal Reserve.

But it’s also due to concerns about the UK economy as it teeters towards recession.

Investors are anxious that Kwarteng’s mini-budget will drive up borrowing – especially as the Office for Budget Responsibility has not been allowed to provide forecasts for today’s event.

RBC Capital Markets say markets are left to speculate on “who has the appetite for gilts when the BoE is selling and the govt is ramping up borrowing at a dizzying pace”.

They forecast that the pound could fall even lower, to below $1.05 – which would be an all-time low.

For us, it leaves weaker GBP [the pound] as the clearest escape valve to keep financing a large current account deficit.

Our forecast is currently sub-1.05 for GBP/USD. If the Chancellor’s gamble to boost growth fails to pay off, it will leave GBP in an even bigger hole.

Minister: plans aren’t a gamble

Simon Clarke, the Secretary of State for Leveling Up, has denied that the government’s fiscal plans are a gamble.

On this morning’s half rounds, Clarke told the BBC that tax cuts will spur economic growth that outstrips rising national debt.

“The evidence of the 1980s and the 1990s is that a dynamic low tax economy is what delivers the best growth rates – this isn’t a gamble, the weight of history and evidence is with us.”

Clarke also told SkyNews that the budget will be a game-changer, and that growth will pay for the UK’s government spending plans

Asked if his view last year that some tax increases would be needed to repair government finances still applied, Clarke said:

“No, because what you’re doing now is that you’re going for growth…

The critical thing is we need to get the economy growing so that, frankly, the economic growth trajectory outstrips that of our debt.”

Here are more details of the slide in consumer confidence this month:

UK consumer confidence
UK consumer confidence Photograph: GfK

IFS Director Paul Johnson has calculated that the mini-budget could be biggest tax-cutting fiscal event since Nigel Lawson’s Budget of 1988.

If Mr Kwarteng does nothing other than reverse NI increase and stop legislated rise in corporation tax, tomorrow’s will be the biggest tax cutting fiscal event since Nigel Lawson’s famous 1988 budget.

Even though this is not a Budget.

Long way to go to match Barber though… pic.twitter.com/HZB6LXg383

— Paul Johnson (@PJTheEconomist) September 22, 2022

Mini-budget: what we expect

Kwasi Kwarteng will on Friday announce 30 separate measures – including tax cuts, new investment zones and an acceleration of infrastructure projects – in an effort to raise the economy’s growth rate to his stated target of 2.5% a year.

One of the main elements of the package – the £13bn reversal of the increase in national insurance contributions, introduced in April to fund the health and social care levy – will come into force on 6 November.

While almost 28 million people will keep more of their earnings as a result of the move, the Resolution Foundation thinktank said on average the poorest 10% of households would gain £11.41 in 2022-23, while the richest 10% of households would gain £ 682.

The mini-budget is expected to contain significant further interventions to boost growth beyond the reversal of the NICs rise and next April’s planned increase in corporation tax, Treasury sources have confirmed, with one Whitehall source describing the package as having “more rabbits than Watership Down ”.

One key plank of the fiscal event will be new investment zones for 38 local and mayoral authorities in England – including West Midlands, Tees Valley, Somerset and Hull – which will have major planning deregulation to release more land for housing and commercial development, and tax cuts for businesses.

Introduction: UK consumers fear for the future as living standards slide

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

Consumers across the UK are the gloomiest on record as the economic picture darkens… as the government announces its plan to kick-start UK economic growth with a flurry of tax cuts that will drive up borrowing.

People are increasingly worried about their personal finances, and anxious that the economy is turning sour, research body GfK warns, a day after the Bank of England said the UK has probably entered recession this quarter.

GfK’s long-running Consumer Confidence Index has fallen another five points this month to a new low of -49.

That’s the worst record since it began in 1974, as the tightening squeeze on living costs made people much more pessimistic about their own finances.

In September the GfK UK Consumer Confidence Index fell a further five points to -49, setting a new record low, with data having been collected every month since 1974. pic.twitter.com/20bPQO2Hkk

— David Edwards (@ScattClouds) September 23, 2022

This is the fourth new low in five months, as the economy has been battered by rising prices and weakening activity.

Confidence in personal finances over the coming year shed nine points to -40, while confidence in the economy over the next 12 months lost eight points to -68, a really grim reading.

People are also very unwilling to buy big ticket items, as soaring inflation forces households to cut back.

GfK client strategy director joe Staton said:

“Consumers are buckling under the pressure of the UK’s growing cost-of-living crisis driven by rapidly rising food prices, domestic fuel bills and mortgage payments.

“They are asking themselves when and how the situation will improve.

Kwasi Kwarteng will vow to break the UK’s “cycle of stagnation” today, by lowering the tax burden in a hotly awaited mini budget..

He’s expected to tell MPs that Britain needs a new approach, ‘focused on growth’, by saying:

“Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise.

“This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s.

Even though today’s statement is officially only a ‘fiscal event’, it’s expected to include a 30-point growth package, including scrapping a planned increase in corporation tax from 19% to 25%, plus reforms to the City of London, ending the cap on bankers’ bonuses, and plans to create up 38 new Investment Zones across England.

Yesterday Kwarteng said the national insurance increase introduced earlier this year will be reversed from 6 November.

But economists are warning that the plan will drive UK borrowing sharply higher, just as government borrowing costs are rising in the bond markets.

The Institute for Fiscal Studies warned this week that Britain’s mounting debts will be unsustainable if the government presses ahead with sweeping tax cuts.

Even once the substantial Energy Price Guarantee has expired in October 2024, borrowing could still run at about £100 billion a year in the mid-2020s.

This is more than £60 billion a year higher than the @OBR_uk forecast in March.

[6/13] pic.twitter.com/iZNk5dKQxw

— Institute for Fiscal Studies (@TheIFS) September 21, 2022

Persistent current budget deficits and rising debt as a share of national income would mean that the two main fiscal targets legislated only in January would be missed.

Even once the Energy Price Guarantee has expired, debt would be left on an ever-increasing path.
[9/13] pic.twitter.com/UuSf6BpXMU

— Institute for Fiscal Studies (@TheIFS) September 21, 2022

GfK’s Staton points out that today’s mini-budget, and the longer-term agenda to drive the economy, are a major opportunity to improve the economic outlook.

It will also be a major test for the popularity of Liz Truss’s new Government.”

UK Consumers Fear for Their Future as Living Standards Plummet
Low st consumer confidence figures since Gfk started compiling survey in 1970s. https://t.co/eykHu9uNLL

— Louise Cooper (@Louiseaileen70) September 23, 2022

We also find out today how manufacturing and services companies in the UK, the US, and across the eurozone, are faring this month – and get a healthcheck on Britain’s retail sector.

Financial markets are subdued, as investors worry that interest rate hikes by central bankers are pushing major economies towards recession.

agenda

  • 9am BST: Eurozone flash PMIs for September

  • 9.30am BST: UK flash PMIs for September

  • 9.30am BST: Chancellor Kwasi Kwarteng presents mini-budget

  • 11am BST: CBI Distributive trends survey of UK retailers

Leave a Comment