Bank of England could respond to British pound hitting new low versus the dollar

Yahoo Finance's Ines Ferré and Akiko Fujita discuss the British pound nearing parity with the U.S. dollar after the UK government revealed its budget and plans for tax cuts.

Video transcript

AKIKO FUJITA: It has been about the dollar. Some big currency moves are following today. And the main action is taking place right there with dollar strength causing turmoil for global FX. We're going to start with the British pound here, an already falling pound touching its weakest level against the US dollar. We're talking about the weakest on record on the back of a badly received mini budget.

And really, Ines, this is one of those stories I think a lot of people were sort of last week started following through when the announcement came through from this new UK government that they would, in fact, be implementing permanent tax cuts. We're talking about sort of Reagan-style trickle-down. And that was not received really well. We saw the big swings.

Now we're talking about at least one analyst-- and we're going to have that guest on later today-- calling for parity in terms of the sterling against the dollar. We're also seeing the euro hit the lowest against the dollar since 2004. So we don't often talk about FX so much, but this is really where all investors are watching right now.

And it's worth pointing out. A note out from Morgan Stanley today saying this is an untenable situation for risk assets, including stocks. Michael Wilson, the analyst, saying, he sees an eventual low for S&P 500 later this year from 3,000 to 3,400. And here's an interesting stat I think will help a lot of people understand why it's so important to be watching these currency moves.

The dollar index up, what, roughly 20% this year. Every 1% change in the dollar index has a negative 1/2% impact on profits. This is according to Morgan Stanley. So Q4, they see, in terms of earnings, facing 10% headwinds from that. So while we're talking about a big story, a policy story over in the UK that's affecting the pound, this is something that will be trickling down all the way over here.

INES FERRE: Yeah, completely. Look, this whole story has been about the US dollar and the strength of the US dollar and creating havoc, really, in abroad. You mentioned the British pound. It has pared some of its losses, but we saw that two-year gilt over in the UK. We can show the chart there. That surging on the British pound, as it went to its lowest level against the US dollar.

Of course, there's been speculation that the Bank of England will respond to the market moves. But you have to wonder, as you were just mentioning, tax cuts, when there is so much inflation and increased spending when there's so much inflation. So it's not surprising that we are seeing some of the moves that we've seen with the markets.