Pound plunges as UK fiscal plan rattles markets

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STORY: It began with a big announcement in Parliament.

“And our plan, Mr. Speaker, is to expand the supply side of the economy through tax incentives and reform.”

New UK finance minister Kwasi Kwarteng last week set out his intention to slash taxes to spur growth.

But the plan hasn’t gone down well with markets.

Sterling tumbled after the announcement, and then plummeted to an all-time low in early Monday (September 26) trade.

It sank close to 1.03 to the dollar, within striking distance of an unprecedented parity.

Rabobank currency strategist Jane Foley says investors are worried that the Bank of England will respond with sharp rate hikes:

“So what the chancellor gives us in terms of tax cuts, we're going to have it taken out in the form of higher mortgage payments, et cetera, meaning that ultimately the boost to demand could be removed and we're left with this legacy of much larger debt. And it's the debt pile that really is of concern to investors.”

By mid-morning in Europe the pound had stabilized.

But it remained close to record lows, and traders said all the pressure pointed down.

UK bonds have also plunged in value as investors bet on higher interest rates ahead.

The government, meanwhile, shows no signs of a rethink.

Over the weekend Kwarteng said he was only getting started, with more tax cuts to come.

Now traders wait for any signs of an emergency move by the Bank of England.