NEW YORK - Speculators are betting the British pound will slide to a level that was virtually unthinkable in recent decades: US$1 or less.
Sterling steadied on Tuesday, but was perched above its record low only thanks to soaring yields on British debt and the hope of a response from the Bank of England (BOE) or British politicians.
The pound was trading at US$1.0774 at 8.59am, up 0.86 per cent from the previous day. Against the Singapore dollar, the pound recovered 0.61 per cent to $1.5462 from its Monday close.
Last Friday and again on Monday the pound plunged, finding a record low of US$1.0327, as investors questioned Britain's economic gambit of unfunded tax cuts to spur growth.
Options markets show that traders expect it to keep falling. Three-month risk-reversal contracts lean the most bearish against the pound since 2016, while others show a nearly 60 per cent chance that it will hit US$1 before the end of this year.
At the same time, analysts at banks including Morgan Stanley and Nomura International said they expected it to touch or cross that threshold.
"I think it is going to get worse, unfortunately," said Mr Jordan Rochester, a London-based strategist for Nomura.
The last time the pound approached US$1 was in 1985, before the major world powers coordinated to drive down the value of the US dollar.
The currency was already pressured by the US dollar before last week, in part because high energy prices were exaggerating Britain's trade deficit and the US Federal Reserve's rate hikes were drawing cash towards the United States.
But the downward pull intensified after the administration of new Prime Minister Liz Truss rolled out plans to enact large-scale tax cuts in the face of an economic slowdown.
This caused a record stampede out of British government bonds, with investors anticipating it will add to the government's already sizeable budget deficit. By stimulating the economy, the step would also be at odds with the BOE's efforts to curb inflation, potentially forcing policymakers to raise interest rates even further.
Strategists at Nomura lowered their target for the pound to US$0.975 by the year end, anticipating it will breach parity by the end of November. Morgan Stanley strategists also revised their pound calls, putting a year-end target on the currency of US$1.
"Tighter monetary policy, which raises concerns about growth and fiscal sustainability... is unlikely to see (sterling) strength in response," Morgan Stanley strategists wrote in a note to clients on Monday.
BLOOMBERG
• With additional information from The Straits Times
