Pound fell nearly 10%, the biggest intraday drop since March 2020, after the new Chancellor of the Exchequer Kwasi Kwarteng pledged further tax cuts, raising fears of another sharp increase in inflation and public debt.
Some market participants called this a "flash crash", but pound has since held onto most of its losses, with derivatives suggesting further declines. The options market now shows about a 60% chance of pound weakening to parity against dollar, being down 2.9% to $1.0545 as of 6:05 am in London.
The sell-off began on Friday after the UK government unveiled its "Growth Plan", where the top income tax rate was eliminated, the base rate lowered by a percentage point, and the National Insurance increase, which was introduced earlier this year, reversed.
The incumbent UK prime minister Liz Truss is likely to face backlash if pound really falls to parity with dollar. Some market participants are already calling for emergency action by the Bank of England to stem the tide
Hedge funds have increased their bullish bets on pound in the days leading up to the crash. Leveraged investors, meanwhile, entered 13,488 net long contracts in the week to September 20, the biggest increase since March.
