The City watchdog is being urged to investigate whether leaks of Kwasi Kwarteng’s mini-budget allowed billionaire hedge fund investors to make “small fortunes” by betting against the pound.
Tulip Siddiq, the shadow economic secretary to the Treasury, said the Financial Conduct Authority needed to determine whether it was possible for traders to have used insider information to benefit from the crashing currency.
The pound fell to an all-time low of $1.03 against the dollar overnight on Monday before recovering lost ground amid speculation that the Bank of England would raise interest rates to shore up the economy.
Siddiq told the Evening Standard there was a case for regulators to ensure that investors with close links to the Conservatives had not benefited from leaked details of Kwarteng’s mini-budget.
“The FCA should investigate any potential wrongdoing, to determine whether it is possible that any leaks or information provided by this Conservative government to their wealthy friends contributed to the collapse of the pound,” she told the paper.
“A weaker pound means that imports such as food and energy will become even more expensive, at time when inflation and the cost-of-living crisis are already spiralling out of control.”
The pressure on the City watchdog comes amid volatile trading in financial markets. Some analysts expect the impact of Kwarteng’s £45bn unfunded tax cuts directed at higher earners to push the pound closer to parity with the dollar. Investors also bet that the Bank of England will be forced to raise interest rates above 5%, up from the current level of 2.25%, by February.
Threadneedle Street said after the stock market closed on Monday it would hold off from making a fresh decision on interest rates until the next meeting of its monetary policy committee in November. However, it added that it would “not hesitate to change interest rates by as much as needed” to return inflation to its 2% target over the medium term.
City investors who are supporters of Liz Truss have been among those shorting the currency, according to the Sunday Times. The sharp moves in financial markets are, however, reflective of a much broader loss of faith in sterling, rather than positions being taken by a small group of investors.
There are few positives for the government from a falling pound, as it raises serious questions over the credibility of Truss’s economic plans and gives a punishing verdict from major global investors.
“[The] policy backdrop is toxic and is pushing [the pound] towards existential crisis,” said analysts at Bank of America.
Sterling has fallen by almost 30 cents against the dollar so far this year as it comes under pressure from a strengthening US currency. Britain is also considered more exposed to the inflation shock from Russia’s war in Ukraine, while sweeping tax cuts have spooked investors who question the government’s commitment to running sustainable public finances.
The FCA declined to comment.