GBP

The British pound remains under pressure against both the euro and the US dollar and wasn’t helped after the Bank of England (BoE) released a statement that they are not looking to intervene as of yet. Sterling has been strained since Friday after Chancellor Kwarteng announced the government’s plans for tax cuts and deregulation. He made further comments over the weekend reiterating that the plans will be debt funded.

UK debt to GDP is already near 100% and the worry for markets is the ability of the UK government to fund their debt without paying away a significant risk premium. This premium can be paid via a higher interest rate expense or a devaluation of the currency, or a combination of both.

This loosening of fiscal policy is in the opposite direction to what the BoE is trying to achieve in reining in sky-high inflation by tightening monetary policy. The loosening of fiscal policy at this stage of the cycle is also in contrast to other developed markets where repaying pandemic debt accumulation is a typical feature. In a statement yesterday, BoE Governor Andrew Bailey hosed down speculation of an immediate change in interest rates or forex intervention. The statement reads “the bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets”.

Markets are now pricing in close to a 150 basis points interest rates hike at the next BoE meeting.

EUR

As Europe continues to scramble to secure energy supplies for the upcoming winter, a recent disruption to the Nord Stream pipelines has caught the attention of many. What originally appeared as gas leaks could potentially be something much more serious. The Swedish National Seismic Network revealed that two major explosions were detected Monday in the same area as the leaks, leading some to speculate that the disruption may in fact be sabotage. Should this be the case, it may take continental geopolitics to a new level.