The Plunging Pound

Bleeding into this week, the British pound reached its lowest level ever Monday, relative to the U.S. dollar.

Building off Friday’s cliff dive selloff, the currency touched $1.0349, 8.2% lower than Thursday’s settlement price of $1.1274. The previous record low was set in 1985.

This selloff was ignited by the British government unveiling a massive program of tax cuts and subsidies late last week, the largest tax cuts since the 1970s, aiming to support their economy amid high eurozone inflation.

The government will cut payroll and income tax, freeze certain corporate taxes, ditch caps on banker bonuses, and spend billions of pounds on subsidizing energy bills. The bill plans to cut the highest tax bracket for those who make 150,000 pounds or more from 45% to 40%, while reducing the basic income tax bracket from 20% to 19%.

This will largely be funded by government borrowing, at an estimated 150 billion pounds, equivalent to $169 billion, over the next 2-year period.

Following this news last Friday, the pound fell off a cliff to its lowest level since 1985 due to increased concerns over inflation.

This comes on the heels of the U.K. central bank raising their key lending rate 50 basis points to 2.25%. This is the highest in 14 years and was considered by some economists as an emergency rate increase.

“We worry that investor confidence in the U.K.’s external sustainability is being eroded fast,” said George Saravelos, global head of foreign exchange at Deutsche Bank. Deutsche currently forecasts eurozone economies to contract 2.2% in 2023.