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Sterling slips after IMF and Moody's rebuke Britain over tax plans

09/28/2022 | 04:02am EST
UK pound coins plunge into water coloured with the European Union flag colours in this illustration picture

LONDON (Reuters) - Sterling resumed its fall on Wednesday after the International Monetary Fund (IMF) and ratings agency Moody's scolded Britain over its new spending plans.

The pound was down 0.56% to $1.068 with renewed dollar strength also weighing on the currency. The euro was up 0.13% against the pound to 0.895.

Sterling tumbled to an all-time low against the dollar of $1.0327 on Monday as investors dumped UK assets after finance minister Kwasi Kwarteng unveiled plans to slash taxes and ramp up borrowing.

The International Monetary Fund on Tuesday released a statement saying "we do not recommend large and untargeted fiscal packages" at a time of high inflation. It suggested the UK government "reevaluate" its plans.

Ratings agency Moody's said the unfunded tax cuts were "credit negative" and were likely to weigh on growth.

However, James Malcolm, head of foreign exchange strategy at UBS, said the fall in the pound on Wednesday was also about dollar strength.

The dollar index hit a new 20-year high of 114.78, and was last up 0.42%, as investors sought the safety of the greenback.

"I think we need to put this in context, sterling's basically consolidating here," he said. "I think it's just as likely that the pound recovers somewhat from here as that it sells off further."

Malcolm said sterling is "fairly priced" after falling more than 20% over the last year.

British government bond yields have soared in the last week, reflecting investor concerns about the UK's fiscal credibility.

The benchmark 10-year gilt rose to as much as 4.582% on Wednesday, its highest since the collapse of failed U.S. investment bank Lehman Brothers in late 2008.

Typically, rising yields would equate to a stronger currency. But such is investor nervousness over the outlook for the British economy that this relationship has eroded.

George Saravelos, global head of FX strategy at Deutsche Bank Research, said investors now wanted more to finance the country's deficits, including a 200-basis-point rate hike by November and a terminal rate up at 6%.

"This is the level of risk premium that the market now demands to stabilize the currency," said Saravelos. "If this isn't delivered, it risks further currency weakening, further imported inflation, and further tightening, a vicious cycle."

(Reporting by Harry Robertson; Editing by Amanda Cooper and Frank Jack Daniel)

By Harry Robertson


ę Reuters 2022
Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / EURO (AUD/EUR) 0.06% 0.64006 Delayed Quote.0.04%
BRITISH POUND / EURO (GBP/EUR) 0.08% 1.16038 Delayed Quote.-2.38%
BRITISH POUND / US DOLLAR (GBP/USD) 0.51% 1.21936 Delayed Quote.-9.88%
CANADIAN DOLLAR / EURO (CAD/EUR) -0.06% 0.699501 Delayed Quote.0.69%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.31% 0.73481 Delayed Quote.-6.97%
DEUTSCHE BANK AG -0.36% 10.038 Delayed Quote.-8.59%
DOW JONES FXCM DOLLAR INDEX -0.22% 12950.1 Real-time Quote.6.71%
EURO / US DOLLAR (EUR/USD) 0.40% 1.0507 Delayed Quote.-7.68%
INDIAN RUPEE / EURO (INR/EUR) -0.22% 0.011564 Delayed Quote.-1.31%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.26% 0.012165 Delayed Quote.-9.07%
MOODY'S CORPORATION 0.35% 293.62 Delayed Quote.-25.42%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.80% 0.63731 Delayed Quote.-7.52%
UK 10Y CASH -0.01% 3.0518 Delayed Quote.243.49%
US DOLLAR / EURO (USD/EUR) -0.40% 0.951765 Delayed Quote.8.32%
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