GBP/USD falls to record low as traders bet on UK rate hike business

As if we don’t have enough bad news, the Organisation for Economic Co-operation and Development (OECD) has said the UK economy will grow at a slower pace this year than previously forecast.

The OECD has downgraded its 2022 GDP growth forecast from 3.6% to 3.4% due to “falling real incomes and disruption to energy markets” as the cost of living crisis hits households.

GDP is also expected to be completely flat in 2023.

Sterling’s slump highlights Kwasi Kwarteng’s schoolboy mistakes

Larry Elliott

Prime Minister Quasi Kwaten Our economics editor Larry Elliott wrote:

If the market is concerned about the government’s finances and the increased borrowing needed to fund your program, adding those worries isn’t the wisest thing to do. Kwarteng’s inexperience has been exposed.

Here’s Larry’s analysis:

what the pound means to you

Philip Inman

We’ve already explained what the plunge in sterling means.

Here’s a flavor:

What is a currency crisis?

It fell sharply when the pound suddenly began to depreciate against rival currencies. The sudden sharp fall in the pound has created uncertainty, throwing British companies into chaos as they plan to import and export goods. They want to pay a certain amount for imports and get a certain price for goods and services they sell abroad. That all changes when the currency falls. If the value of the pound falls, the cost of importing goods from overseas will rise.

What does this mean for the UK and consumers?

A weaker pound means it is more expensive to import goods and services into the UK. This means prices will go up for UK consumers buying foreign goods, which means your money won’t be spent as much if you travel, in this case to countries that use US dollars.

Oil is one of the main commodities Britain imports and is priced in US dollars on the international commodity market. A weak pound will make it more expensive to fill up your car with diesel or petrol. Natural gas is also denominated in dollars…

Here is the complete part:

He explained that money markets are now pricing in an emergency rate hike of 175 basis points by November after the pound hit a record low against the dollar overnight. Victoria scholarInvestment Director interactive investor:

Sterling’s knee-jerk reaction had pared losses early Monday, before recovering after European markets opened this morning. A slump in the pound could exacerbate inflation problems in Britain, where prices are near double digits. More expensive imports could add upward price pressure in Britain, which could prompt more aggressive action from central bank policymakers.

After the Federal Reserve raised rates by 75 basis points on Wednesday, the Bank of England opted for a more modest 50 basis point hike, which felt like a mistake given the chancellor’s small budget and market impact. It looks like an emergency rate hike is on the horizon as the Bank of England scrambles to bring inflation back closer to target and quell the currency crisis.

Scholar added that the UK bond market has collapsed as yields have soared:

Two-year gilt yields hit their highest levels since the peak of the financial crisis in 2008, while 10-year yields hit their highest levels since April 2010. Investors will be compensated more for holding government bonds. The level of unfunded borrowing set by the chancellor to pay tax cuts.

On top of that, the market is pricing in an increased likelihood that the Bank of England will act sooner to raise interest rates, raise yields and penalize bond prices.

Traders are pricing in a sharp rise in UK interest rates.

Bloomberg reported that money markets now expect interest rates to rise by more than 165 basis points after the Bank of England’s next meeting in November.

That would lift rates to nearly 4% from 2.25% today, and could soon be an emergency move, combined with a hike in November.

By next summer, money markets now expect the Bank of England’s benchmark rate to hit 6%.

That would hit mortgage affordability hard, deepen the recession and push some heavily indebted companies to the wall.

This Financial Times There are also good options:

Traders have increased bets on an emergency rate hike ahead of the Bank of England’s next meeting in November. Derivatives market pricing rose more than 0.5 percent in the week and nearly 1.5 percent at the November meeting…

Unlike its Japanese counterparts who intervened last week, Britain lacks the resources and may lack the will to try to intervene directly in currency markets to support the pound.

However, the Bank of England’s rate-setting Monetary Policy Committee meets outside the normal cycles of past market turmoil to restore calm, usually by cutting rates. The Bank of England has not raised rates between scheduled meetings since gaining independence in 1997.