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Citi says sterling-dollar parity is possible as UK risks currency crisis

A trader, center, wears a Citigroup jacket while working on the floor of the New York Stock Exchange.

Michael Nagle | Bloomberg | Getty Images

LONDON — The UK is risking a currency crisis that could lead to a parity of the pound with the dollar, according to analysts at Citi.

The UK government announced the most significant program of tax cuts in decades on Friday morning, as Chancellor of the Exchequer Kwasi Kwarteng said the Treasury was targeting 2.5% growth. UK economic growth has been sluggish in recent years and the Bank of England said on Thursday it was likely in recession.

Traders, however, seemed to panic over the prospect of the UK increasing its already record-high debt-to-GDP ratio as it spends additional billions on economic support for households and businesses during the European energy crisis, with government bond yields hitting the highest level. point increases daily rate in over a decade.

At 4 p.m. London time on Friday, the pound had lost more than 3% against the dollar, marking a new 37-year low of $1.0915. It was last briefly at this level in 1985, when it weakened due to rate hikes in the US

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Analysts said there was now a significant chance that currencies would reach parity for the first time in history. Sterling’s all-time low is close to $1.05.

Vasileios Gkionakis of Citi said he expected the pound to trade in a range of $1.05 to $1.10 in the coming months, but risks of a lower break towards parity had increased.

“We think the UK will find it increasingly difficult to fund this deficit amid a deteriorating economic backdrop; something has to admit, and that will ultimately be a much lower exchange rate,” he said in a research note.

Antoine Bouvet and Chris Turner of Dutch bank ING said FX options now estimate the probability of dollar parity at the end of the year at 17%, up from 6% at the end of June.

“Given our bias that the dollar rally is also going into overdrive, we think the market has underpriced the odds of parity,” they said in a note.

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The euro was also weaker against the dollar on Friday, falling 1.1% but climbing 1.8% against the pound to 0.8890.

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