Sterling’s response to the government’s announcement was almost immediate and extreme.
The pound lost almost 3.6% against the dollar on Friday and continued to fall on Monday when the market reopened. It hit an all-time low below $1.04 early Monday morning in London.
It has since recovered slightly, trading around $1.08 at 8:30 a.m. Tuesday, but remains at what was — until last week — a 37-year low. It has fallen from $1[ads1].35 at the start of the year.
While some supporters of the government’s plan have pointed to the dollar’s bull run this year as the reason for the pound’s fall, the pound also fell against the euro.
The euro is currently trading around £0.89 – up from £0.84 at the start of the year – despite the eurozone facing significant challenges of its own, from an energy crisis to rising recession risks.
UK government bond yields have skyrocketed following the government’s budget – meaning their prices have fallen drastically (bond yields move inversely to prices).
Gilded yields is now set for its biggest monthly increase since at least 1957, according to a Reuters analysis of data from both Refinitiv and the Bank of England.
The yield on 10-year gilts, which affects mortgage and other borrowing rates, has risen from 2.882% to 4.073% so far in September.
High interest rates and a falling pound have led to some mortgage lenders putting new mortgages on hold and withdrawing certain mortgage offers.
More rate hikes?
A key question now is whether the Bank of England, which has already raised interest rates from 0.1% to 2.25% in the past nine months, will be pushed into faster and higher rate hikes.
On Monday, Governor Andrew Bailey said the bank “would not hesitate to change interest rates as necessary”. However, he said a decision would be made at the next scheduled meeting in November, playing down speculation about an emergency rate hike or intervention to prop up the pound.
The UK overnight indexed swaps market now points to an 80% chance of a rise to 3.5% by November 3, which would be a 125 basis point increase, and a 20% chance of an even higher rise to 3.75% .