In this illustration taken on May 30, 2022, a woman holds a British pound banknote. REUTERS/Dado Ruvic/Illustration
LONDON: It’s starting to look like nothing can stop the British pound from falling to new lows.
With inflation set to exceed 18% next year and households across the country likely to run out of energy this winter, Britain’s economic woes are getting worse by the day. The consensus among traders is that the Bank of England will have no choice but to push the economy into a deep recession, causing widespread unemployment and curbing price pressures.
It puts the historic lows of the pound within reach. The currency is trading around $1.18, less than 4 cents off its lowest since 1985 against the dollar, highlighting the challenges facing the UK economy and the next prime minister. The BOE is already predicting his five-quarter-long recession starting later this year.
“Will there be more downside? Sure,” said Jeff Yu, senior currency strategist at Bank of New York Mellon Corporation. Achieving that would be very difficult. ”
Soaring electricity prices are impacting financial markets through rising inflation expectations, leading traders to believe the BOE must become more aggressive. Financial markets are now predicting the benchmark interest rate will rise by 4.25% next year, his highest since 2008. This will also boost bond yields, with the 10-year rate he rising to 2.59%.
In theory, higher interest rates should lead to a stronger currency. But now in England it’s the other way around. Investors believe that a further aggressive increase in borrowing costs needed to keep prices down will exacerbate the UK’s economic woes, making it worse than the US and the eurozone. I’m here.
“When the trade-off between growth and inflation is this bad, interest rates won’t always be enough to support the currency,” said Kit Jacks, chief currency strategist at Societe Generale in London.
UK inflation hit a 40-year high last month at 10.1% year-on-year, with Citigroup saying it could top 18% in January. According to consultancy Baringa Partners, more than half of UK households are at risk of running out of energy this winter due to skyrocketing bills.
Below is a snapshot of what is happening in other markets in the UK.
sale of bonds
Yields on the UK’s short-term benchmark bonds, which are most sensitive to changes in monetary policy, are poised to hit record highs this month. Two-year yields rose 111 basis points and borrowing costs he rose to 2.82%. This is the highest level since the 2008 global financial crisis.
A weaker pound has helped big UK exporters, with the FTSE 100 index gaining 0.3% in August. The FTSE 250 Index fell 4.6% for him as recession fears weighed on small businesses.
corporate debt gap
Inflation fears underperformed short-term corporate bonds this month. The additional yields that require investors to hold sterling banknotes instead of euro-denominated bonds have widened to their highest levels in recent years.