The pound rose sharply after the Bank of England’s bond-buying program curbed selling pressure on British debt securities, but left currency traders facing wider worries about the country’s tax cut plan.
Sterling fell 1.1% to $1.0767, equalizing gains on Wednesday after the Bank of England said it would buy unlimited long-term bonds until October 14 to stave off a crash in the UK bond market. Thursday’s slide puts the currency on track for its worst month since the UK voted to leave the European Union in June 2016.
Investors also sold other G-10 currencies for the safe-haven dollar.
Pound sterling suffers biggest monthly loss since Brexit
Everyone from investors to the International Monetary Fund is concerned that the UK’s fiscal stimulus measures could cause inflation and inflate the national debt. The currency hit a record low against the US dollar earlier this week, sparking speculation that it could reach parity with the dollar.
The Bank of England said it would buy up to £5bn ($5.4bn) per day of long-term government bonds until 14 October. On Wednesday, he spent close to a billion pounds and 30-year yields fell 105 basis points (b/d), the biggest drop on record tracked by Refinitiv since 1992.
The move supported the pound and eased some of the market turmoil, but by mid-afternoon in Tokyo, the pound struggled for support and fell 1% to $1.0776.
„It’s all a bit confusing,” said ANZ economist Finn Robinson.
“It is not yet clear how long the calm and fresh optimism will last. Firstly, this re-stimulus will raise, not suppress, inflation in the UK, which is bad for bonds and sterling.”
The consequences of the unjustified tax cuts announced in the UK last week were reflected in financial markets after the collapse in British asset prices. The Bank of England’s intervention followed steps in Korea, India and Indonesia to stabilize their financial markets this week as the US dollar generally strengthened.
Later on Thursday, investors’ attention will be focused on three speeches by the Bank of England, media appearances by British Prime Minister Liz Truss, inflation data from Germany and statements by the Federal Reserve.
“Please note that nothing has fundamentally changed, except for the circuit breaker provided by BOE,” said Singapore-based DBS rate strategist Eugene Leow.
US Treasuries rose in a broader trend with UK equities on Wednesday, with benchmark 10-year yields falling more than 20 basis points before climbing to 3.818% in Asia.
The fall of the dollar also stopped. The US Dollar Index had its worst session in 2.5 years on Wednesday, pulling back from record highs. But the dollar found buyers in Asia all day, pushing the index up 0.5% to 113.56.
The euro fell about 0.7% to $0.9665. The Australian dollar fell 0.8% to $0.6470. The Kiwi dropped 1% to $0.5674.