Sterling continued to tumble on Monday, reaching fresh all-time lows against the dollar in early trading on Asian markets.
The pound fell sharply on Friday in response to chancellor Kwasi Kwarteng’s controversial mini budget, which hiked government borrowing to pay for tax cuts, the majority of which were targeted at higher earners.
The currency hit lows not seen since 1985 shortly after he delivered his fiscal statement, and as trading got underway overnight on Monday it continued to slide. At one stage it lost 5% to $1.0327, levels not since Britain went decimal in 1971, before settling around 3% lower at $1.054.
Markets are concerned that Kwarteng’s tax cut-focused mini budget will do little to boost growth and will instead add to inflation, already at record highs. That in turn will cause the Bank of England to ramp up interest rates and the cost of borrowing even further.
Many traders believe that the pound could reach parity with the dollar, potentially as early as this week.
Naeem Aslam, chief market analyst at AvaTrade, said: “Sterling is getting absolutely pounded. [It] looks like an emerging market currency, especially when you look at the price of the pound a few months ago and compare it to where it is now.
“The reality is that traders have lost their trust in lawmakers. In addition, the BofE has made mistake after mistake, which has further shattered confidence in sterling.
“We believe that the pound/dollar could easily reach parity this week.”
Kwarteng has defended Friday’s fiscal statement, however, and on Sunday hinted there could be more tax cuts to come.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The pound has been on a fast downwards track of a rollercoaster, plunging to record lows yet again this morning. Comments by Kwarteng that he will go even further with historic tax cuts, which are already being criticised as reckless, have added to the anxiety.
“Sterling’s slide makes imports more expensive, so the falls we have seen in oil prices over recent weeks won’t be fully felt at the petrol pumps, and hoped for lower food prices will now take longer to materialise.
“There is now a tense stand-off between the BoE and the Treasury, with policymakers determined to try and bring down inflation by dampening demand while politicians are focused intently on trying to boost demand and promote their growth agenda.”
