British Pound Weakness Far From Over? Options Market Positions Indicate Currency Will Fall To $1 Or Below

After the British pound tumbled to its record low on Monday following the U.K. government’s huge tax cut announcements, speculators in the options market are taking positions that indicate the currency will fall to $1 or below, reported Bloomberg.

Three-month risk-reversal contracts against the pound are close to the most bearish since 2016, while others indicate a 43% chance it will hit the $1-mark before the end of 2022, the report said.

Also Read: Explained: Why The British Pound Hit A Record Low Against The Dollar

What Happened: The pound’s downward movement was triggered after Britain’s new Chancellor of the Exchequer Kwasi Kwarteng announced the biggest package of tax cuts in 50 years last week in what has been dubbed the “mini-budget”. Kwarteng said there is a need for a major change of direction to boost economic growth. The pound fell to a record low against the dollar on Monday, dropping to as low as $1.0327

Kwarteng cut income tax and stamp duty on home purchases and has also done away with a planned hike in business taxes.

Central Bank Action: On Monday, the Bank of England Governor Andrew Bailey tried to calm markets by saying the central bank won’t hesitate to hike rates by as much as needed to rein in inflation.

The comments quashed speculation that the central bank would enforce an emergency rate hike to boost the pound, the report said.

Price Action: On Tuesday, the pound was trading higher against the dollar at $1.0783. The Invesco CurrencyShares British Pound Sterling Trust FXB is down close to 20% since the beginning of the year.