Traders bet on UK interest rate hikes after pound plunges to record low against dollar – business live | Business

Labour are urging the City regulator to investigate whether leaks of the mini-Budget allowed hedge fund managers to make huge profits by shorting the pound.

Shadow City minister Tulip Siddiq told the Evening Standard that the Financial Conduct Authority should examine reports that some hedge fund bosses had made “small fortunes” by betting against sterling.

Ms Siddiq told The Standard:

“The Financial Conduct Authority should investigate any potential wrongdoing, to determine whether it is possible that any leaks or information provided by this Conservative Government to their wealthy friends contributed to the collapse of the Pound.

“A weaker Pound means that imports such as food and energy will become even more expensive, at time when inflation and the cost-of-living crisis is already spiralling out of control.”

The Sunday Times had some fascinating detail about the hedge-fund bosses who have been betting against sterling.

They reported:

A source who was present at a dinner attended by hedge-fund managers a week ago revealed: “They were all supporters of Truss and every one of them was shorting the pound.”

Several made small fortunes on Friday betting against the currency.

As if we didn’t have enough bad news, the Organisation for Economic Co-operation and Development (OECD) has said the UK economy will grow slower than previously predicted this year.

The OECD has downgraded its forecast for GDP growth in 2022 to 3.4%, from 3.6%, due to “declining real incomes and disruptions in energy markets” (as the cost of living crisis hits households).

GDP is expected to flatline entirely in 2023 too.

Pound’s plummet underlines schoolboy error by Kwasi Kwarteng

Larry Elliott

Chancellor Kwasi Kwarteng committed a ‘schoolboy error’ by pledging further tax cuts in a full budget planned for later this year, our economics editor Larry Elliott writes:

If the markets are worried about the state of the government’s finances and the increase in borrowing needed to fund your plans, it is not the wisest course of action to add to those concerns. Kwarteng’s inexperience has been exposed.

Here’s Larry’s analysis:

What the tumbling pound means to you

Phillip Inman

We’ve pulled together an explained about what the slump in the pound means.

Here’s a flavour:

What is a currency crisis?

When the pound suddenly begins to lose value against rival currencies in a steep decline. A sudden and sharp drop in the pound creates uncertainty, throwing the plans of UK businesses that import and export goods into disarray. They expected to pay a specific sum for imports and get a certain price for goods and services they sell abroad. All that changes when the currency falls. If the pound is worth less, the cost of importing goods from overseas goes up.

What does it mean for the UK and consumers?

A weaker pound means the cost of goods and services that are imported to the UK are more expensive. That means price rises for UK consumers who buy foreign goods, and it means your money won’t go as far if you travel, in this case to countries that use the US dollar.

Oil is one of the key goods Britain imports and it is priced on international commodity markets in dollars. A weak pound will make filling up your car with diesel or petrol more expensive. Gas is also priced in dollars…

And here’s the full piece:

Money markets are now pricing in an emergency rate hike with 175 basis points’ worth of increases by November after the pound hit a record low against the US dollar overnight, explains Victoria Scholar, head of investment at Interactive Investor:

The knee-jerk reaction in GBP early on Monday has since pared losses with the pound regaining ground after the European market open this morning. The slump in sterling could exacerbate the UK’s inflation problem with price levels currently flirting with double digits. More expensive imports may add to the UK’s upward price pressures, which is likely to prompt more aggressive action from central bank policy makers.

Following the Fed’s 75 basis point move on Wednesday, the Bank of England opted for a more moderate 50 basis point rise, which in light of the Chancellor’s mini-budget and the market fallout, feels like a mistake. It looks like an emergency rate hike is on the cards as the Bank of England scrambles to bring inflation back down closer to target and calm the currency crisis.

The UK bond market has collapsed with yields surging, Scholar adds:

The two-year gilt yield hit the highest level since the height of the financial crisis in 2008 while the 10-year yield hit the highest since April 2010. Investors will be compensated more for holding government bonds, which have become riskier, given the elevated levels of unfunded borrowing that has been mapped out by the Chancellor to pay for his tax cuts.

On top of that the market is pricing in an increased probability that the Bank of England will move more quickly to raise interest rates, also lifting yields and punishing bond prices.

Traders are pricing in some dramatic increases in UK interest rates.

Bloomberg reports that the money markets now expect rates to have risen by more than 165 basis points after the BOE’s next meeting in November.

That would take rates to almost 4%, from 2.25% today, and could potentially come as an emergency move soon, plus a hike in November.

By next summer, the money markets are currently pricing that Bank of England base rate would hit 6%.

That would drastically hit mortgage affordability, and deepen the recession, and push some indebted firms to the wall too.

The Financial Times has a good take too:

Traders ramped up bets on an emergency interest rate rise before the Bank of England’s next meeting in November. Derivatives markets are pricing in a rise of more than 0.5 percentage points in a week’s time and an increase of nearly 1.5 percentage points by the November meeting…..

The UK lacks the resources, and likely also the willingness, to try and intervene directly in currency markets to prop up the pound, unlike peers in Japan, which intervened last week.

However, the BoE’s rate-setting Monetary Policy Committee has met outside the normal cycle when markets have been turbulent in the past in a bid to restore calm, typically by cutting rates. Since it gained independence in 1997, the BoE has never raised rates between scheduled meetings.