GBP Takes A Pound-ing

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What's going on?

The pound sterling fell to an all-time low versus the US dollar on Monday.

What does this mean?

Investors weren’t impressed when the British government unveiled a package of tax cuts late last week – but anyone hoping they’d do a U-turn over the weekend will have been sorely disappointed: since Friday, the government has doubled down on its stance and declared that there’s even “more to come”. That was not what most investors wanted to hear: many worry that the moves could make inflation worse – and with borrowing costs rising, the decision to take on even more debt is particularly risky. The result: investors flocked to the exits on Monday, sending the pound plunging nearly 5% versus the dollar, to trade as low as $1.035.

Why should I care?

For markets: Confidence falls further.
At first the pound made up much of its losses, but that wasn’t because any good news broke. See, the currency looked so weak that it sparked rumors the Bank of England (BoE), which raised rates just last week, would have to take emergency action to stabilize it. So when the BoE announced later on Monday that it had no plans to make emergency hikes, the news hit the currency market with a thud: within minutes, the pound was in free fall once again, dropping a whole two cents against the dollar. 

The bigger picture: Even more inflation.
When your currency’s in free fall, it’s bad to be a net importer – that is, a country that imports more than it exports. Unfortunately that’s exactly what the UK is – meaning that foreign goods will probably get more and more expensive for Brits. And “goods getting more and more expensive” is a layman’s way of saying – you guessed it – even more inflation.

Originally posted as part of the Finimize daily email.

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