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British Pounds Sink to New Lows After Tax Cut Announcement

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By Augustine Mbam - - 5 Mins Read

The British pound has fallen to a record 37 years low against the dollar after the financial market reacted to the tax cut announcement. 

At 3:40 p.m. London time, GBP dropped as low as $1.09 after the House of Commons unveiled a program of tax cuts. However, at the time of this writing, current prices have sunk to $1.08

GBP price level on TradingView

It was reported that the British pound fell more than 2% against the dollar after Kwasi Kwarteng outlined economic measures and tax cuts. 

GBP wasn't the only asset affected as the UK financial market was shaken. Financial experts reported that some bonds and shares' value went low after the tax cut was unveiled. 

UK's FTSE 100 index of major shares dropped to its lowest in 2 months after its share value dropped to more than 2%.

According to data provided by Bloomberg, financial analysts predict that UK interest rates might get to a rate of 5.2% before August 2023. 

Newsvot has gathered information regarding the cause of the tax cut announcement. The cost of government borrowing warranted new chancellor Kwasi Kwarteng to unveil the new tax cuts. 

Citizens set to Benefit from the Tax Cut Announcement 

According to financial analysts, the primary reason for the tax cut program unveiled by new chancellor Kwasi Kwarteng was for the citizens' benefit. 

With the tax cut program, households in the UK are set to get a drop in property taxes and a planned corporation tax scrapping. 

However, the government tax cut program came with disadvantages as the UK financial market has been in turmoil since its announcement. 

Some financial analysts consider this latest move by the government as a gamble. Speaking on the latest move by the government, global bond portfolio manager Bethany Payne says: "This huge fiscal event is a radical economic gamble; a 'Go big or go home' gamble that will put UK debt on an unstable footing." 

"We had been concerned over the ability of the Bank of England to sustainably sell gilts through the quantitative tightening due to start on Oct. 3, but today we are asking whether quantitative tightening is over before it even began," she said. 

Another financial expert has another opinion on the latest move by the government. David Page, AXA Investment Management head of macro research, said:" This is "fiscal stimulus at a time when the Bank of England is already worried about aggregate demand being too high, and it’s highly likely to force the Bank of England to raise rates even more than we thought they were going to otherwise."

Investors Doubt Government Plans 

While speaking to the press, top financial experts have revealed that the latest move by the UK government has led to a distrust in UK financial market. 

After the tax cut announcement, investors' doubts led to GBP and share prices sinking. 

Speaking on investors' stance on the tax cut announcement, Jane Foley, a currency strategist at Rabobank, said: "They're worried that some of these tax cuts that have been announced aren't going to be fully funded. That will result in a large amount of debt at a time when the Bank of England is going to be selling some of its holdings of UK government debt."