Perhaps the greatest anomaly of this year remains why the US Dollar has held such a strong value against other major currencies given that the United States economy has been subjected to similar obstacles that have affected its peers in Great Britain and on the European Mainland.
As this week began, the British Pound collapsed in value to a record low against the US dollar as investors rushed to sell the currency and government bonds in a demonstration of skepticism over new Prime Minister Liz Truss’s economic plans, however since then further displays of low confidence have surfaced.
Yesterday, 10 major retail banks in the United Kingdom removed a plethora of mortgage products from the market, and considerably reworked the terms available on some of the mortgage products which remain on the market, in order to manage potential risk if interest rates rise to the expected 5 to 6% by January.
Should such a level of interest rates be reached, this would increase payments on personal and commercial debt substantially, as currently the interest rate is around 2.6%.
This, combined with a tanking Pound, and inflation heading for 18% by January according to Citigroup analysts last month, is a combination of equations which do not make for a healthy borrowing environment.
By removing these mortgage products, the property market outside London has begun to be affected, and consumer activity including house purchasing is likely to be curtailed, which would slow down the economy even further.
The FTSE 100 responded to this accordingly yesterday, with house building company stock losing value whilst raw materials providers and mineral extraction giants rose in value.
It certainly appears that the commodities and materials sector is buoyant due to high demand, but anything requiring borrowing in order to purchase the final product is now sinking in value.
The Pound is now almost at parity with the US Dollar, as demonstrated earlier today during the Asian trading session when the British Pound reached a low point of $1.0327 against the US Dollar, surpassing the previous record low reached in 1985, before making back some of its value.
Precarious is an understatement. With banks mitigating risk on such a massive scale, it looks like the roller coaster ride is not yet over.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.