© Reuters. FILE PHOTO: Pound and US dollar banknotes are seen in this illustration taken on January 6, 2020. REUTERS/Dado Ruvic/Illustration
By Lucy Raitano
LONDON (Reuters) – The pound touched a new 37-year low against the dollar on Wednesday after Russian President Vladimir Putin’s accusation of “nuclear blackmail” by the West boosted the safe-haven dollar.
Expected interest rates from the US Federal Reserve (Fed) later in the day played into market sentiment, with eyes also on a Bank of England interest rate decision and a new government mini-budget this week.
By 1143 GMT, the pound was down 0.31% against the dollar at $1.13460 pence, having previously hit $1.13040 – the lowest since 1985.
“This morning’s dip is mainly a function of the Russian news. Sterling also generally trades on risk appetite, which is one reason it has been so weak this year,” said Colin Asher, senior economist at Mizuho Corporate Bank.
The pound has lost 16% in value against the dollar so far this year as fears of a global recession have mounted, along with flaring geopolitical tensions and soaring inflation.
Sterling traders are anticipating an expected interest rate hike on Thursday from the Bank of England (BoE), which is struggling to protect the economy from a cost of living crisis, as well as the domestic fiscal policy implications of a planned mini. -budget of the government of newly installed Conservative Prime Minister Liz Truss.
“It’s a bit difficult for the Bank of England because their current forecasting modus operandi suggests they will only consider announced government policy,” Asher said.
Money markets are fully pricing in a 75 basis point increase from the BoE, with a 50 basis point increase a more distant possibility, in the face of red-hot consumer inflation and sluggish growth.
After Thursday’s BoE meeting, new finance minister Kwasi Kwarteng will update parliament on his first “mini-budget”, which will aim to support households and businesses through next winter and is likely to include tax cuts.
“There are concerns about the sustainability of such an expansionary fiscal policy, together with the news of plans to cap energy bills, it’s still a pretty bad combination for the pound at the moment because the market doesn’t trust that the measures will be effective or sustainable,” Francesco said. Pesole, FX strategist at ING.
Britain’s budget deficit was larger than expected in August, data released on Wednesday showed, further focusing on the difficult financial backdrop in Britain.
The Office for National Statistics said public sector borrowing excluding state-owned banks stood at 11.82 billion pounds ($13.44 billion) last month. A Reuters poll of economists showed borrowing at 8.45 billion pounds.