The British pound sterling fell to its lowest point against the US dollar in 37 years. The pound fell further to a low of $1.0350 after the Chancellor of the Exchequer said there would be more to come. Three weeks into her term, Truss made a huge mistake by arguing that the U.K. economy would get a shot in the arm.
MarketBeat.com - MarketBeat A number of tax cuts for higher income earnings and business incentives spooked investors, who dumped the pound and bought the U.S. dollar. The proposed tax cuts would be the highest in almost 50 years. The yield for the 10-year U.K. bonds is expected to spike towards 12-year highs due to the U.K. government turning on the printing presses. Just days after the Bank of England raised interest rates, they said that the U.K. economy is likely to go into a recession. Inflation hit a 40 year high in August. The nation's finances have been affected by a number of expenses.
The public backlash, crash of the British pound, and sell off of U.K. bonds forced the Bank of England to launch a temporary quantitative easing. The finance minister said that the abolition of the 45p tax rate has become a distraction. We are not going to abolish the 45p tax rate at this time. We are aware of it and have listened to it. The pound sterling rebounded and the yield on the bond fell.
The Bank of England was one of the first central banks to intervene in the bond market. Most people don't think the reasons for the intervention are valid. The yield on British government bonds spiked as investors dumped them. The British pension funds have over $1 billion in assets. The funds use derivatives to hedge interest rate risk and maximize gains. Massive leverage is utilized by derivatives. There was a chance that the U.K. pension funds could have had a Lehman Brothers moment. The BoE bought bonds in order to push down long-term yields.
The Fed's stance is that they won't stop rate hikes until inflation falls under their 2% target. It is unclear if that means maintaining an aggressive rate cut strategy or pulling back the magnitude of the rate hikes. The latter wants a floor for the equity markets. The BoE may have set a precedent for the world's central banks by intervening in the bond market. The BoE intervention temporarily calmed the equity markets as the odds of a 50-basis point rate hike in the November meeting improved. There was debate if our own Fed would blink. The 75-basis point rate hike odds rebounded back to 81% by the end of the week after the jobs report came in better than expected. The unemployment rate is 3.5%, which is down from 3.7%. The economy isn't slowing down fast enough so the Fed will have to keep an eye on inflation.
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