gbp fundamentals

British Pound Tumbles As BOE Slashes Rates, UK Announces £50 Billion Bailout

Wednesday, 08 October 2008 22:26:34 GMT  |  Terri Belkas, Currency Strategist

We’ve known for a while that the UK economy and financial markets were in rough shape, but the announcement of a massive bailout plan by the UK government made it incredibly obvious how dire the situation is and sent the British pound plummeting over 300 points against the US dollar.

Indeed, along with the Bank of England’s 50bp cut to the Bank Rate to 4.50 percent, the UK Prime Minister Gordon Brown announced a plan to inject £50 billion worth of taxpayer money into banks including Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, RBS and Standard Chartered. This differs from the US bailout though, as the UK government will seek shares of the companies in return, and provided that the markets eventually recover, taxpayers should see a return on the “investment” when share prices improve. In addition to this though, £200 billion will be available under the Special Liquidity Scheme, which will facilitate the exchange of some illiquid assets for UK Treasury Bills. The problem, however, is not necessarily liquidity but a pronounced lack confidence, and there’s only so much the UK can do on their own to fix that. I think there’s major downside potential for the British pound in the long term, though I wouldn’t be surprised to see a short-term bounce within the next few days. In that environment, it may be best to sell rallies in pairs like GBP/USD.


Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars