Pound slumps against US dollar after Fitch sounds alarm on UK finances

The pound slumped against the US dollar today while UK debt sold off after one of the world’s top credit rating agencies issued a sombre warning to investors about the country’s finances.

Sterling weakened 1.55 per cent against the greenback to buy 1.115. It fell by a slightly smaller amount against the euro too.

The pound took a beating against the dollar yesterday, driven by investors still fretting over Britain’s public finances despite prime minister Liz Truss outlining her plans to stimulate growth in her Tory Conference speech.

Truss said more taxes and more regulation are “wrong, wrong, wrong” in the speech.

“Sterling ended a run of six consecutive daily gains against the US Dollar to close 1.31 per cent lower, closing back at $1.13,” analysts at Deutsche Bank said.

Pound/US dollar exchange rate

“And that wasn’t simply a story of dollar strength, as the pound weakened against every other G10 currency as well,” they added.

UK borrowing costs trended higher during opening exchanges in the City.

Yields on the 10-year UK government bond climbed five basis points, cementing it above four per cent. 

Rates on the 2-year gilt added eight basis points. Yields and prices move in opposite directions.

Late last night, Fitch, a credit rating agency, downgraded its outlook for the UK to negative from stable.

Sweeping tax cuts and high public spending prompted the sour assessment. Truss and chancellor Kwasi Kwarteng reversed the 1.25 percentage point national insurance and six percentage point corporation tax hikes at their mini budget last month.

That will suck over £50bn out of the treasury’s coffers, Fitch estimated.

As a result, the government is on course for a borrowing splurge to finance capping household energy bills at £2,500 for two years.

“The large and unfunded fiscal package announced as part of the new government’s growth plan could lead to a significant increase in fiscal deficits over the medium term,” Fitch said.

London’s FTSE 100 closed 0.4 per cent lower.