British pound sterling plunges to a record low against dollar

The British pound plunged to a record low on Monday morning, following last week’s announcement by the new UK government that it would implement tax cuts and investment incentives to boost growth.

Sterling briefly fell 4 per cent to an all-time low of $1.0382 on Monday in Asia, continuing its sluggish trade in recent months as the US dollar strengthens.

The last time the pound fell so much against the dollar was in October 2016, in the aftermath of the Brexit vote. Analysts said the fall reflects the darkening outlook for the economy, with consumers and businesses facing rising prices and soaring energy bills.

The Bank of England has predicted the UK will fall into recession towards the end of this year.

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Critics say the government’s economic measures will disproportionately benefit the wealthy and could see the UK take on high levels of debt at a time of rising interest rates.

Major tax cuts

″[It] doesn’t seem like the UK government is throwing the market a bone here in terms of having a much more tempered fiscal trajectory, and so I think at this point right now, the path of least resistance is going to remain lower,” Mazen Issa, senior forex strategist at TD Securities, told CNBC before the pound hit a new low.

Billed as a “mini-budget” by UK finance minister Kwasi Kwarteng, Friday’s fiscal announcement saw a volume of tax cuts not seen in Britain since 1972. Market players immediately predicted that Britain would have to scale up its bond issuance and significantly increase its debt load to pay for the cuts. On Sunday, Kwarteng also talked up the possibility of more tax cuts in the coming months.

Fears over economy

Fears have grown over the prospects for the UK economy after figures showed it shrank between April and June, with businesses and households feeling the impact of rising prices. Those concerns were fuelled on Thursday, with a new study suggesting the manufacturing sector shrank in August for the first time since May 2020.

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A separate report by the Resolution Foundation think tank said typical household disposable incomes are on course to fall by £3,000 over this year and next, which is called the “the deepest living standards squeeze in a century”.

The cost-of-living crisis is set to be the biggest challenge facing the new Prime Minister.