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Title : Pound Slumps as Bank of England is Forced to Widen Gilt Purchases

Writer's picture: analysiswatchanalysiswatch

Oct 11, 2022 03:04AM ET

By:AnalysisWatch


The dollar rose in early European trading Tuesday, while the pound weakened amid fresh signs of trouble in the U.K. government bond market.


The Bank of England said it would expand its purchases of gilts to include index-linked bonds, following a disorderly sell-off in the asset class on Monday, which appeared to have been triggered-again-by pension funds raising cash to meet margins on long-term interest rate swaps.


The bank announced its decision in a statement.


The move raises questions about whether the bank will be able to end its outright purchases of gilts on Friday, as planned. On Monday, it announced it would replace daily auctions with repo operations, whose effect on the money supply (and thus inflation) may be mitigated by other actions to manage the money market.


During the Asian session, the dollar touched its highest level in two weeks after Federal Reserve Vice Chair Lael Brainard repeated that the central bank will continue to raise U.S. interest rates in the near term, amid signs that the labor market is proving resistant to the tightening of monetary policy seen so far.


However, both Brainard and, before her, Chicago Fed President Charles Evans, have also said the Fed needs to be cautious about any future rate hikes, acknowledging the risk of overdoing it.


"The Fed's relentless and most aggressive tightening cycle since the early 1980s is starting to create some casualties," ING analysts Chris Turner and Francesco Pesole said in a note to clients. "While the wounds in U.K. asset markets were self-inflicted, the occasion demonstrated that the tighter liquidity conditions being created by the Fed are leaving no room for error."

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