The pound fell to a new low against the dollar on Monday, dropping to as low as $1.0327 during morning trade before recouping the $1.05 level.
What happened last week: Investors and traders were spooked as Britain s new Chancellor of the Exchequer Kwasi Kwarteng announced the biggest tax cuts in 50 years and called the mini-budget Kwarteng said there was a need for a major change of direction to boost economic growth. He removed the income tax and stamp duty on home purchases, and did not add a hike in business taxes.
The pound was hurt by Kwarteng's pledge to cut taxes.
We've only been here 19 days. I believe that it is the British people that are going to drive the economy, and I want to see more people retain more of their income over the next year, according to Bloomberg.
Taxes are a major source of fiscal income. A reduction in taxes is important to push growth, but traders and investors seem unconvinced by the new policies, mainly for two reasons.
A drastic tax cut could lead to a wide fiscal deficit. There is a double whammy here. With asset prices falling, yields on U.K. bonds or gilts are rising, which means the government will have to shell out higher interest rates to borrow funds from the market to plug the potential deficit.
The Crash: The bulk of the pound's crash occurred in about 20 minutes on Monday, according to Bloomberg, which was the biggest intra-day since March 2020. The report said that options markets indicate that the odds of the pound falling to par with the dollar this year have risen to 63%.
Expert take: Considering the relatively low FX Reserves and ghost of the past Black Wednesday BoE, it may be reluctant to intervene in the FX markets. It would be a desperate move and would embolden speculators further. In a note, IFA Global Research said that an out-of- policy rate hike is more likely.