The British pound hit a new low of $1.0349 against the US dollar in the early hours of Monday but has pared losses after the U.K government revealed the largest tax cut since the 1970 s last week.
The pound GBPUSD made a historic dive on Friday after U.K. Chancellor Kwasi Kwarteng unveiled a mini-fiscal budget which includes a number of tax cutting measures that will be financed by 62 billion of government borrowing.
The pound dropped to $1.0850 after the announcement was the lowest level since 1985 and the third worst daily performance since Black Wednesday in 1992, according to Deutsche Bank analysts. The pound was topped only after the U.K. voted to leave the European Union and global markets reacted to the emergence of the Pandemic in March 2020.
The early hours of the weekend saw sterling fall 2.5% to $1.0349 from early trading in Asian markets but losses were trimmed back to $1.0728, according to investors.
Kwarteng remained unmoved about market movements and the short term risks to inflation, according to the BBC.
As chancellor of the exchequer, I don't comment on market movements. He said that the focus of his focus is on growth of the economy and making sure that Britain is an attractive place to invest.
I am certain that the Bank is dealing with inflation but also what perplexed me was the fact that people are rising cost of living by taking more of their money in tax. The pound has dropped 20% on the year.
The yield on the 10 year gilt TMBMKGB 10 Y went up another 31 basis points to 4.13%.
Author Paul Krugman has argued that the pound's depreciation will improve the U.K's investment position and questioned why the crash would cause a balance sheet currency crisis.
Analysts like Avatrade s Naem Aslam reckon that the Bank of England could step in by increasing interest rates by a full percentage point. It raised rates to 2.25% on Thursday.
An unexpected announcement is highly anticipated from the Bank, and traders should be cautious about this, he said.
The Federal Reserve hiked interest rates by 75 basis points last week and said it would hike more, which has helped the U.S. dollar grow in strength.
The euroUSD is stable at $0.9685.