Sterling crashes, GBP/USD hits record low.

UK Chancellor Kwarteng announced his fiscal statement in the House of Commons with even more aggressive tax cuts than expected. As expected, the National Insurance increases were reversed from November and the planned corporate tax increases for next year were cancelled. In addition, there will also be income tax cuts from next April.

The government expects that the energy guarantee scheme will cost £60bn over the next six months. The overall government borrowing requirement will increase substantially for the next three years. The 2022/23 requirement is set to increase by £72bn to over £160bn with deficit likely to remain above £100bn over the following few years.

UK yields increased sharply with the 5-year yield close to 4.00% and markets also expect the Bank of England will have to raise interest rates more aggressively.

There will be increased speculation over an emergency Bank of England rate hike. Overall confidence in the UK and Sterling outlook deteriorated sharply with heavy Sterling losses on Friday.

The UK currency plunged to 37-year lows around 1.0850 against the dollar while the Euro surged to 20-month highs just above 0.8900.

Sterling then crashed in Asia with GBP/USD posting a record low below 1.0400 before a recovery to above 1.0500. GBP/EUR also posted 2-year lows below above 1.0900 before a limited correction.

The Euro-Zone PMI manufacturing index retreated to a 27-month low of 48.5 from 49.6 and slightly below forecasts while the services index retreated to a 19-month low of 48.9 from 49.8 with both figures slightly below market expectations. New orders declined sharply on the month while business confidence dipped sharply to the lowest level since May 2020.

There was a renewed increase in costs for the month and output charges increased at a faster rate despite weaker demand as companies protected margins.

The US PMI manufacturing index edged higher to a 2-month high of 51.8 for September from 51.5 previously and slightly above consensus forecasts of 51.1. The services-sector strengthened to a 3-month high of 49.2 from 43.7 and well above expectations of 45.0, although this was still the third successive month in contraction.

New orders returned to expansion for the month and there was a significant improvement in business confidence. There was a further net easing of upward pressure on costs and selling prices, although pressures were still strong in historic terms.

Global equities were subjected to further sharp selling pressure on Friday with fears over global recession and aggressive Federal Reserve action to control inflation.

The dollar surged to fresh 20-year highs on defensive demand with the Euro sliding to fresh 20-year lows below 0.9600 before a slight recovery.

Exit polls for the Italian election confirmed that the Brothers of Italy party will be the largest party with over 25% of the vote.

There are strong expectations of a right-wing coalition led by Meloni.

Euro long positions caught out

CFTC data recorded a sharp reversal with investors moving to a net long position of over 33,000 contracts from a 12,000 short previously, increasing the scope for position liquidation.

Currency market volatility has surged since early Europe on Friday. Euro-Zone data reinforced reservations over the Euro-Zone outlook.

The dollar secured strong support as risk appetite collapsed. US yields moved only slightly lower despite the slide in equities. The Italian election outlook also unsettled the Euro. EUR/USD slumped to below 0.9700 on Friday and posted 20-year lows below 0.9600 on Monday before a slight correction.

The yen failed to gain defensive support with USD/JPY strengthening to 143.30. Former top Japanese currency diplomat Shinohara stated that it was unlikely that the 145 level against the yen would be defended as a line in the sand with action limited to a smoothing operation. USD/JPY strengthened to above 144.00 on Monday.

The Swiss franc gained strong support as risk appetite deteriorated further and volatility intensified. EUR/CHF declined sharply to record lows around 0.9420. USD/CHF secured a limited net advance to 0.9850.

Sterling collapsed in Asia on Monday with the slide in global risk appetite reinforcing selling pressure. GBP/USD plunged to record lows below 1.0400 before a rebound to 1.0600.

Dollar strength and a slide in equites triggered heavy losses for commodity currencies. AUD/USD slumped to 2-year lows below 0.6500. USD/CAD also surged to 2-year highs around 1.3635.

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