Soaring UK inflation pushes pound near 37-year low

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It looks like nothing can stop the pound from plunging to new lows.

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With inflation rumored to top 18% next year and families across the country at risk of being pushed into fuel poverty this winter, the UK’s economic woes are getting worse by the day. day. The consensus among traders is that the Bank of England will have no choice but to plunge the economy into a severe recession and cause widespread job losses to curb price pressures.

This puts historic lows for the pound within reach. The currency is trading around $1.18, less than 4 US cents from its weakest level since 1985 against the dollar, underscoring the challenges facing the UK economy and the next prime minister. The BOE is already forecasting a five-quarter recession beginning later this year.

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“Are there more disadvantages? Yes, absolutely,” said Geoff Yu, senior currency strategist at Bank of New York Mellon Corp. “Even if things improve, the British pound cannot return to its previous level of $1.40 or $1.45. This is going to be very difficult to achieve. »

Soaring power prices are feeding through to financial markets through higher inflation expectations, leading traders to believe the BOE will need to be more aggressive. Money markets now expect benchmark interest rates to rise by 4.25% next year, the highest since 2008. This is also pushing bond yields higher, with 10-year rates climbing to 2 .59%.

Theoretically, higher rates should lead to a stronger currency. But for the UK right now, it’s the opposite. The belief among investors is that further aggressive hikes in borrowing costs – needed to depress price growth – would deepen Britain’s economic malaise, making the country worse off against the United States and the eurozone.

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« Rates won’t always be enough to support a currency when the growth-inflation trade-off is so bad, » said Kit Juckes, chief currency strategist at Societe Generale SA in London.

UK inflation hit a 40-year high of 10.1% year-on-year last month, and Citigroup Inc. said it could top 18% in January. According to consultancy Baringa Partners, more than half of UK households are at risk of being pushed into fuel poverty this winter due to soaring bills.

Here’s a look at what’s happening in other UK markets:

Bond liquidation

Yields on short-term UK benchmark bonds – which are the most sensitive to changes in monetary policy – ​​are set to climb by a record high this month. Two-year yields rose 111 basis points, bringing borrowing costs to 2.82%, the highest since the 2008 global financial crisis.

Stocks are gaining

The weaker pound gave major UK exporters a boost, and the FTSE 100 index posted a 0.3% gain in August. However, recession fears are weighing on smaller businesses, driving the FTSE 250 index down 4.6%.

Corporate debt gap

Short-term corporate debt underperformed this month on inflation fears. The extra return investors demand for holding sterling notes instead of euro-denominated debt has reached its highest level in years.