Pound US Dollar Exchange Rate News: GBP/USD Crashed to 37-Year Lows after UK Tax Cuts

Modified: Friday, 23 September 2022 15:35 BST - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Crashed to 37-Year Lows after UK Tax Cuts

Pound (GBP) Sunk on Mounting Fears of Out-of-Control Borrowing

The Pound (GBP) plummeted against its peers on Friday in the wake of the Chancellor of the Exchequer Kwasi Kwarteng unveiling his expansive and sweeping tax cut plans to promote economic growth.

Despite announcing extensive tax cuts across the board, the biggest tax event since the 1970s, there are fears about the long-term cost of borrowing to fund such measures. Kwarteng opted to scrap the higher income tax band, cancelled the corporation tax increase, and scrapped the bankers’ bonus cap. Susannah Streeter, Senior Investment and Markets Analyst at Hargreaves Lansdown, has warned that the confidence in the UK economy is fading fast. Streeter added:

’Kwasi Kwarteng has set off fireworks with this budget, which collides with the Bank of England’s efforts to dampen down inflation, while sparking a firestorm of criticism about benefiting the wealthy much more than the poorer sections of society.

‘Scrapping the top rate of tax will return many thousands of pounds to high earners, while lifting the cap on bankers’ bonuses is likely to be hard to swallow for low paid workers on the picket lines, calling for pay rises to help them survive the cost-of-living crisis.’

Meanwhile, further weighing on the Pound is the ever-falling consumer confidence. Amidst the cost-of-living crisis, consumer confidence tumbled to -49, the lowest level since the survey began in 1974. Waning optimism of the UK economy was also reflected in the CBI Distributive Trades survey released on Friday. Retail sales balance dropped to -20 from 37 in August. The lowest reading in five months showed UK households reining in spending.

US Dollar (USD) Bolstered on Risk-Averse Market

The US Dollar (USD) surged to its highest levels since 1985 against the Pound and hit a 20-year high against a basket of currencies. Persistent fears over the global economy have seen safe-haven flows return.

With the printing of less than stellar PMI data from major markets around the world, the US Dollar enjoyed a surge in demand as global market sentiment drifted between rocky and despondent. Fears of a global recession edge ever higher, combined with geopolitical tensions, safe-haven currencies such as the US Dollar.

Further propping up the ‘Greenback’ is the continued hawkish stance from the Federal Reserve. In its monetary policy statement, policymakers, led by Fed Chair Jerome Powell, maintained their firm stance on bringing down inflation. In a speech after the Fed’s interest rate decision, Powell reiterated their strong position:

‘We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done’

Meanwhile, better than expected PMI data lent more support to the US Dollar. Both the manufacturing and service sectors saw marginal improvement, beating out forecasts and edging closer to expansion.

GBP/USD Exchange Rate Forecast: Pound to Sink to All-Time Low?

Looking ahead and with no further major data until next week, the Pound US Dollar could plummet to all-time lows in the wake of the wave of unfunded tax cuts from the UK Chancellor. RBC Capital Markets are concerned that the Pound could plunge below $1.05, they commented:

‘If the Chancellor’s gamble to boost growth fails to pay off, it will leave GBP in an even bigger hole.’

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