Franco Macchiavelli (Activotrade) | During Monday’s Asian session, sterling experienced a flash crash with percentage falls not seen since Brexit.
In just 20 minutes, sterling plunged to near parity with the dollar at the 1.03 level (Asian session lows), levels not seen since 1985.
In addition to the sharp fall in the currency, bonds also experienced intense moves, with jumps of 50 basis points (the largest daily jump in UK debt in history).
Catalyst for the fall
Confidence in the country’s economic viability was shaken following last Friday’s announcement by Liz Truss’s new Conservative party of a significant tax cut plan (the biggest tax cut since 1972).
On top of this, over the weekend, Chancellor Kwasi Kwarteng (Truss’s economic minister) announced the tax cuts were not over, and that there was still more to come and more tax reduction plans to be added.
The market reaction to this news has been devastating.
This plunge demonstrates the lack of market confidence in the UK and a significant weakening of its financial strength.
The tax cuts increase the risk of the pound reaching parity with the dollar, which could prompt the BoE to make an emergency intervention to balance the situation (much like what happened recently with the Bank of Japan and the yen).