Pound Dives And Inflation Bets Hit A Record On U.K. Energy Crisis
The U.K. energy crisis is sparking another wave of bets on hotter inflation and weakening the pound.
(Bloomberg) -- The UK energy crisis is sparking another wave of bets on hotter inflation and weakening the pound.
The British currency fell to $1.1757, the lowest since March 2020. One-year inflation swaps linked to the retail price index -- a measure of how fast traders see consumer costs rising -- soared more than 1 percentage point to 12.7%, breaking a previous record set last week.
The moves come on the back of surging natural gas prices in the UK and Europe. Traders are increasingly concerned about a prolonged cut to energy supplies, which would worsen inflation that’s already at multi-decade highs.
The UK is also facing uncertainty over government policy, with a new prime minister set to be chosen next month. Thin trading conditions in August may also be heightening market volatility, said Rohan Khanna, a rates strategist at UBS Group AG.
Economists at Citigroup Inc. forecast that the UK’s consumer prices index of inflation will soar to 18.6% in January. British households will see the average energy bill soar to £3,554 ($4,200) a year in October when the UK next raises a cap on prices, according to consultancy Cornwall Insight Ltd.
Globally, bond markets tumbled on Monday with investors expecting hawkish rhetoric from Federal Reserve. UK 10-year yields rose as much as 11 basis points to 2.52%.
In Europe, 10-year German bond yields rose as much as 8 basis points to 1.31%. Comparable inflation swaps rose to 8.63%.
Part of what’s also hurting the pound is that traders believe the Bank of England will be hamstrung in its efforts to raise rates because of the weak economy. A decades-high reading of UK inflation and a plunge in consumer confidence last week have added to speculation the country is headed for stagflation.
Many strategists see more losses for sterling versus the dollar. HSBC Bank Plc expects the UK currency to trade around $1.16 in the first quarter of 2023.
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