Do you want to know about European markets? It's in your inbox before the opening. If you sign up, you'll get notifications.
The market selloff that followed the release of the UK government's fiscal plan left Liz Truss's days-old administration facing a crucial verdict from traders.
There was a ferocious and damaging assessment of the prospects for the UK following the all-out gamble on tax cuts and extra borrowing. The Chancellor promised more tax cuts this weekend.
If the selloff deepens as traders deliver their real-time verdict this week, it could lead to a crisis that could necessitate a policy response.
The currency is likely to weaken further due to broad unfunded spending on the fiscal side and monetary policy not being able to offset the inflationary impulse.
In a sign of the severity of Friday's selloff, the pound was set for its worst day against the dollar in two years. The 3.6% slump was the seventh worst in the past 50 years. Government bond yields went up by a record amount as investors punished the Chancellor for his pursuit of growth.
The Resolution Foundation estimate is needed to fund the plan over the next five years because of the move in yields.
The open of currency markets in Asia on Sunday will show if the worst is over. The sterling flash crash in late 2016 shows that small moves can quickly turn into serious slumps. Monday's opening of the gilt market will be watched.
It could have huge ramifications. According to the Telegraph, if the pound falls to parity with the dollar, she will face a rebellion from her Conservative colleagues. Some in the markets are calling for emergency action from the Bank of England to stem the tide, an unprecedented action in modern times that could cause more panic.
Adam Posen said that he expects Bailey to say by the end of the week that the rate will go up if the pound goes down. He also mentioned the possibility of Treasury intervention to prop up the pound on Sunday before the open, but others pointed out that Britain's foreign currency reserves are much smaller than those of Japan.
BOE MPC will have to briefly give Nr. 11 time to reverse folly. I presume HMT will make some kind of useless attempt to intervene in fx markets ahead of Monday Asia open. But I would expect - and encourage - the Governor/MPC to say publicly by mid-week that if GBP down, rates up.— Adam Posen (@AdamPosen) September 23, 2022
If the weekend break has brought some calm, and moves start to retrace on Monday, that will give the two of them time to seize back control of the agenda. It would increase the importance of the conference, which now risks being turned into a chance to restore credibility.
The historic gamble with the UK future is already unraveling.
Many in the market don't think it's going to get better. The turmoil last week resulted in more predictions that the pound will fall below parity with the dollar. There is a one-in-four chance that the pound will reach $1 in the next six months.
Some people are worried about the future of UK debt. The central bank's support through quantitative easing has been thrown into reverse by officials who want to keep a lid on price gains.
HSBC analysts wrote in a note on Friday that the gilt market is adjusting to a big change in the fiscal landscape. The return of such large-scale borrowing of this nature comes at the same time as the BOE is turning from a buyer to a seller of bonds and other investors are concerned about the UK's fiscal credibility.
The pound fell to a 37 year low of $1.084, the yield on 10-year debt rose to 3.83%, and the rate of five-year notes jumped to a record high.
The pound is closer to the dollar than it has been in 37 years.
More than double the size of the move announced on Thursday that took rates to 2.05%, traders fully priced 120 basis points of additional rate hikes from the BOE by its November meeting. The head of gilt inter-dealer broker and agency desks at Tradition said that traders are now pricing in the possibility of an increase.
The Chancellor told the Financial Times that it was important to keep calm and focus on the long-term strategy.
The market has dim views of that strategy.
It looks like investors will continue to shun sterling unless something can be done to address fiscal concerns or the economy shows some surprisingly strong growth data.
You can follow us on social media and sign up for The Readout newsletter.