GBP/USD falls to 1.0350 in the Asian session as investors lose confidence in the UK after historic tax cuts from Chancellor Kwasi Kwarteng and the promise of more cuts to come.
· Pound US dollar parity is looking increasingly likely. Could the BoE step in to support GBP?
· Far-right Giorgia Meloni wins the Italian election raising concerns over Italian – EU relations
· German IFO business sentiment is expected to deteriorate; the DAX trades at a 22-month low
The pound fell 4.8% last week and is tumbling again at the start of the week as investors continue digesting Chancellor Kwasi Kwarteng’s mini-budget. Rather than fixing the UK economy, investors are fretting that the huge, unfunded tax cuts and energy support package will send inflation and government debt soaring. The “Growth plan” is set to be the biggest tax giveaway in 50 years as Kwarteng scrapped the top level of income tax and reversed an increase in national insurance, among other measures.
Investors are selling out of the pound and gilts as confidence in the UK collapses. The FTSE closed 2% lower on Friday at 7018 but is managing to edge higher in early trade today, thanks to the dramatically weak pound.
GBP/USD fell to 1.0350 on the open, with the latest step lower fueled by Kwai Kwarteng’s comments that “there is more to come” on tax cuts. Expectations are climbing that the BoE will need to hike rates aggressively in the November meeting, with some believing that an emergency move could come from the BoE as early as this week.
Just a few months ago, the pound falling to parity against the US dollar was unthinkable. Now, with the pound just a breath away from parity, it looks more likely than not. GBP/USD trades at 1.05 at the time of writing.
Italian elections
The euro continues to trade under pressure, unable to catch a break. If it’s not a flare-up in the Russian and Ukraine war, the energy crisis, or a hawkish Fed, politics could be the next brewing problem.
Giorgia Meloni won a clear majority in Sunday’s Italian elections. The first ever Italian female prime minister is set to lead the most right-wing government since the second world war. The markets are concerned about what this means for Italian – EU relations but also what risk it could bring to the Draghi-formulated economic recovery in Italy.
The Italian FTSE MIB has opened flat after falling 5% last week.
EURUSD fell to a 20-year low of 0.9550 in the Asian session before recovering to current levels of 0.9640.
German IFO business sentiment
The economic calendar is relatively quiet today, with the main focus on German IFO business climate figures, which are expected to show a deterioration in business sentiment to 87, down from 88.5. Given the surging inflation, rising energy costs, and the deepening cost of living crisis, another fall in the index would not be so surprising.
The DAX tumbled 3.6% last week, falling to a 22-month low. The index is set to fall 0.7% on the open.
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