The British pound has witnessed phenomenal volatility today as it plunged in overnight trading, then it staged a miraculous recover during the day, but it turned lower yet again. This morning GBP/USD slumped to a record low, and it was down over 2% versus the Swiss franc and the euro. Last Friday, the UK government announced a mini budget, which saw a series of tax cuts as the Truss administration is determined to stimulate the economy, but the cuts would require a huge wave of borrowing. The UK is already facing slowing growth, high CPI, and rising interest rates, and there are worries the raft of tax cuts might not boost the economy. There are fears that government borrowing could surge but without seeing a corresponding increase in economic activity, which would be the worst of both worlds, and that is why the pound was hammered last Friday and today. One way to combat a falling currency is to lift interest rates, and there is growing speculation the Bank of England might step up its hiking cycle to stabilise the pound.
Equity markets having played second fiddle to currencies today. European indices largely closed lower. It is a little surprising that eurozone stocks did not see more volatility in light of the election result in Italy, whereby a coalition of Far Right parties will form the next government. The Brothers of Italy party, which is eurosceptic, took the largest share of the vote, and that could have major political ramifications for Italy’s relationship with the EU. Over on Wall Street, the S&P500 has lost ground again as bond yields are rising. The US 10-year yield hit 3.78%, and keep in mind it was below 3.30% in early September.
The upward move in US yields is propping up the US dollar index, AUD/USD and EUR/USD are down on the session. The broader bearish sentiment in the markets is hurting industrial commodities as metals and energies are lower. Copper fell to two-month low, and WTI traded at a level last seen in January. Gold is under pressure from both the rise in yields and the gains in the US dollar.