Has the pound recovered? BoE announce emergency intervention

A Rollarcoaster Week for GBP EUR - Weekly Review June 18th 

The pound and UK financial markets have been in turmoil over the last few days following the governments mini-budget announcement on Friday, where they pledged to cut taxes by billions of pounds. The budget is un-costed and will have to be debt-financed to cover the cost of the cuts.

Monday’s session, saw cable (GBPUSD) drop to all-time lows, with GBPEUR rates hitting 2-year lows at the worst point of trading. The pound recovered throughout the day yesterday, and at one point was 1.5% up against the dollar. Some of these gains have been lost overnight.

Yesterday, the Bank of England announced that they would intervene in the government bonds market to stabilise a collapse in the price of bonds. They said the decision to buy government bonds was caused by ‘a material risk to UK financial stability’. The pound fell initially post announcement before recovering close to levels seen at the start of the day.

A weaker pound increases the cost of imports of services and goods. Businesses will ultimately have to pass on the increase in cost to consumers which will further fuel inflation. The Bank of England are under pressure to keep inflation under control and protect the value of the pound.

On Monday, the bank confirmed they stand ready to tackle inflation with all tools available but will not hold an emergency monetary policy meeting. The next meeting is set for 3rd November. Markets are now beginning to expect a ‘super hike’ from the bank, meaning they may raise by more than 1% or 100 basis points.

There is now a serious risk that the UK is going to face a deeper and longer recession than expected which would be negative for sterling. If the bank does announce a ‘super hike’ in November, then interest rates in the UK will have risen far sharper than expected even a few months ago.

The increase in the cost of borrowing will drive up mortgage prices for everyday Britons. Household disposable income will therefore decrease as people pay more cover their rising mortgage and energy bills. As disposable income decreases so does the amount of money being spent in the economy, and this will negatively impact growth.

GBPEUR hit 1.05 the last time the UK was in a recession. £200,000 now buys €12,400 less than a month ago. If the pound were to drop to 1.05. £200,000 would buy €13,000 euros less than today.

Labour leader Keir Starmer and even some Tory MP’s are calling for the budget announcement to be reversed. This would be a spectacular U-turn for the Truss government and is not expected. However, a reversal in policy would likely hand aid to a struggling pound.

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