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British Pound Drops To All-Time Lows: 'Existential Crisis Is Looming'

Published 26/09/2022, 16:10
Updated 26/09/2022, 17:10
© Reuters.  British Pound Drops To All-Time Lows: 'Existential Crisis Is Looming'

© Reuters. British Pound Drops To All-Time Lows: 'Existential Crisis Is Looming'

The iShares MSCI United Kingdom ETF (NYSE: EWU) traded lower by another 0.8% on Monday and is now down 7.5% overall in the last five days as investors continue to react to the new U.K. government's aggressive series of tax cuts that sent the British pound to a record low against the U.S. dollar on Monday morning.

What Happened? On Friday, new U.K. Prime Minister Liz Truss announced a bold stimulus program that includes tax cuts and investment incentives.

The U.K. government is planning to cancel a planned corporate tax rate hike, reverse a recent increase in the income tax and cut taxes for certain businesses in designated investment zones. The new stimulus program came after the Bank of England said Thursday the U.K. economy is likely already in a recession.

On Monday, the pound briefly dropped to an all-time low of $1.0382 against the dollar before recovering to around $1.0855. The Invesco CurrencyShares British Pound Strlng ETF (NYSE: FXB) is now down 19.3% year-to-date.

Why It's Important: Just last week, the Bank of England raised interest rates by 0.5% to 2.25%. The Bank of England was reportedly preparing a statement Monday and could potentially even enact an emergency rate hike in response to the weakness in the pound.

Related Link: S&P 500 Circles New 2022 Lows Following Latest Fed Rate Hike: Is A Recession Inevitable?

Investors have been spooked by new U.K. tax cuts and investment measures that critics say will disproportionately benefit the wealthy and contribute further to the U.K.'s debt problem as interest rates rise rapidly.

Bank of America (NYSE:BAC) economist Robert Wood said Monday that an "existential crisis is looming" in the U.K.

"Countries with better debt dynamics than the U.K. have been treated more harshly than GBP has up to now, but one cannot escape the fact that the Great British Pound Reset has further to go. All notions of historical fair valuation can be put aside – momentum is clearly pointing in one direction," Wood said.

Wood also raised his terminal U.K. interest rate forecast to 5.25%, more than double the current rate, and said he does not expect the next U.K. rate cut until at least 2025.

Steve Forbes, chair of Forbes media, also said Monday that central banks around the world have been focusing on interest rates and slowing economic growth instead of stabilizing currencies.

Forbes pointed to President Ronald Reagan's efforts to sell dollars and buy up other currencies following Fed Chair Paul Volcker's more than 20% rate hike to fight U.S. inflation in the early 1980s.

“The real cure is to stabilize the currency. You don’t have to make people poor to conquer inflation," Forbes said.

Benzinga's Take: The SPDR S&P 500 ETF Trust (NYSE: SPY (NYSE:SPY)) is also down 22.6% year-to-date, but the longer-term chart paints a much more telling picture of the U.K.'s unique economic struggles in a post-Brexit world.

Over the last 10 years, the SPY ETF is up 154%, while the EWU fund is down 26% overall.

Photo via Shutterstock.

© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Read the original article on Benzinga

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