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

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

Michael Nagle | Bloomberg | Getty Images

LONDON – The UK is facing a currency crisis that could send sterling and the dollar into a par, Citi analysts say.

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

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However, traders appeared panicked by the prospect of the UK increasing its already record high debt-to-GDP ratio as it spends extra billions on economic support for households and businesses amid Europe’s energy crisis, with government bond yields hitting record highs. daily rate for more than ten years.

By 4pm London time on Friday, the pound had fallen more than 3% against the dollar, marking a fresh 37-year low of $1.0915. The last time it was at this level was briefly in 1985, when it weakened amid rising US interest rates.

Analysts said there was now a significant chance the currencies would reach parity for the first time in history. Sterling is near an all-time low of $1.05.

Citi’s Vasileios Gkionakis said he expected the pound to trade between $1.05 and $1.10 over the next few months, but risks of the pound falling towards parity had increased.

“We think it will become increasingly difficult for the UK to finance this deficit, for example in the context of a worsening economic situation; something has to give and ultimately that something will be a much lower exchange rate,” he said in his research.

Antoine Bouvet and Chris Turner of Dutch bank ING said FX options were valuing the probability of dollar-sterling parity by the end of the year at 17%, compared with 6% at the end of June.

“Given our bias that the dollar rally will also be overdone, we think the market may be underestimating the parity opportunities,” they said in a note.

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

Stocks fall as UK unveils debt-financed tax cut