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The Pounding of the Pound

As last week's movements shifted focus to currency markets there was a trade that caught everyone’s attention despite no intervention and it was the GBPUSD ( Sterling Pound against US Dollar). It reached almost parity level which means one pound is equal to one dollar, a level not witnessed since 1985.

Though the value of the pound has been on a slide since Global Financial Crisis the current level makes the long-term slide reach a critical juncture.

The reasons for such a drastic fall were not that much global as local. On Friday, the UK government announced measures to “ease” the coming winter pain. The main measure announced was that energy bills will be capped for all and this would cost £60Bn for the first 6 months.

Now, this would be accompanied by measures that revenue-generating to pay for it but instead, the new government announced measures that would reduce the revenue such as increasing the cap for stamp duty on property sales.

This was not taken well by investors and resulted in both currency and bond markets falling by 3% each. Even on Monday, the fall continued but there was respite in mid-day trade as the Bank of England and Finance Ministry was going to make statements. But the respite was short-lived and both markets ended the day with deep cuts for the second consecutive day.

While the statements did not give any hint of intervention in any market but if there is no action taken to stop the slide in these markets it will impact the economy negatively creating more pain. And this anticipation would speed up the capital outflows as compared to the regular period putting more pressure on bond, currency, and equity markets.


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