The recent dynamics of the pound sterling could not but remind of the anniversary of the famous attack of currency speculators on the Bank of England 30 years ago. Those events are still associated by many with the name of George Soros, although he was not alone in that game. Then other well-known traders (for example, Tudor Jones and Bruce Kovner), banks, pension funds, insurers and others made good money.
Usually this attack is dated September 16, when Black Wednesday happened and the pound fell from about $1.86 to $1.78. But in fact, it started a week earlier from the level of $2 and ended later: many closed their positions on the 20th of September near $1.7, but the fall ended only in the region of $1.5 in November. So the anniversary will be extended, and the British currency is celebrating it gently for now.
There is no talk now about the swiftness of the fall thirty years ago, but the pound itself is much lower than then. The dates match pretty well. After a week of growth, on September 13, the rate reached $1.1738, and then went down, and yesterday, having lost 3.4% over the past days, it fell to $1.1305. This is its minimum since March 1985, the lowest rate of the British currency in history (on the eve of the Plaza agreement, which curbed the super-strong dollar, the pound was about $1.05).
Another thing is that this is only part of a long way down, which began back in June last year. Since then, the pound has fallen by 20.7%, which is already comparable to the scale of the fall in 1992. But although the process is much slower than then, its bottom line results may well be more impressive than the depreciation of a quarter of 30 years ago.
The situation in the British economy and the public sector this year is deteriorating right before our eyes, and the Bank of England, unlike those times, is not trying to stand as a rock in the way of currency speculators. On Wednesday, the immediate cause of the fall was the fact that the British budget deficit in August was larger than expected.
At the same time, the Office for National Statistics reported that public sector borrowing amounted to £11.82bn for the month, while, according to a Reuters poll, analysts had forecast £8.45bn. the maximum level for August since the start of recording these data.
The latter was related to servicing government bonds tied to inflation. It was 9.9% in August, and next year a number of investment banks expect to see figures above 20%.
All of this was a reminder of the plight of new finance minister Kwasi Kwarteng, who is preparing his first “mini-budget” for parliament. Prime Minister Liz Truss has already announced a cap on energy bills for households. Heating and electricity costs will be no more than £2,500 a year, much less than projected. Businesses will learn the details of a similar aid on Friday.
At the same time, Truss ruled out extending the windfall tax for oil and gas companies introduced under the previous government, and abandons plans to increase corporate tax. Critics say her approach to this piece is inspired by Margaret Thatcher and Ronald Reagan, and it’s an unfortunate response to the crisis.
Investors are worried that the government will increase debt too much. Meanwhile, according to Bloomberg data, the UK current account deficit has already reached its highest level since 1997. All this leads to a weakening of the pound.
Former officials, who can afford more than the current ones, speak about it in a loud voice. Thus, the ex-governor of the Bank of England, Mark Carney, said he was concerned about the country’s dependence on foreign investment to finance its deficit. And Dartmouth College economics professor Danny Blanchflower, who served on the Bank of England’s Monetary Policy Committee from 2006 to 2009, called Liz Truss’ economic policy catastrophic on Tuesday. On Wednesday, he even called for “short” the pound.
Not surprisingly, the market is waiting for the continuation of the downward movement. At the beginning of the month, some investment banks named the region of $1.05 as its ultimate goal. In this case, the losses since June last year will be 26.3%. But there are already voices that it is possible to move further – to the first ever parity with the dollar and even lower.