| For a limited time, enjoy 30% off an annual digital subscription. Your support protects our vital independence and keeps us free of a paywall. To say thank you, we'll unlock unlimited reading in our quality news app and ad-free reading on all your devices. | | | | |  The financial markets are growing more nervous over UK assets as prime minister Liz Truss prepares to announce an emergency energy package to protect consumers and businesses from soaring bills.
The plan, which will be unveiled this morning, could freeze the utility price cap at £2,500 until 2024, rather than the average bill rising over £3,500 next month as planned.
Investors are concerned that the package, which could cost upwards of £130bn, will be funded by higher borrowing. So while it would bring urgently-needed relief this winter, the package could also add to inflation in the medium-term – with prices already rising at over 10% per year.
These fears drove the pound to its lowest level in 37 years yesterday, as it briefly dropped as low as $1.1403. That's the weakest point against the dollar since Margaret Thatcher was PM – one Thatcherite comparison Truss will not appreciate.
The pound has now shed almost 15% of its value this year – and is a long way shy of its pre-EU referendum levels of almost $1.50.
Dollar strength is another factor – the greenback has hit its highest levels in two decades against the euro and the yen too.
Truss's pledge to cut taxes to spur growth could also put pressure on the Bank of England to keep interest rates higher for longer.
Concerns about "Trussonomics" helped push UK benchmark borrowing costs to the highest level in over a decade this week, with the yield (or interest rate) on 10-year gilts rising over 3%, meaning it costs more to borrow.
Analysts at MUFG Bank have warned that the pound could fall further against the dollar (the £-$ rate known as "cable" in City jargon).
They told clients that Britain's budget deficit (what the government borrows to balance the books) and current account deficit (the shortfall in imports and exports, and net financial income) are a concern.
New chancellor Kwasi Kwarteng yesterday tried to calm nervous markets.
At a meeting with top City bank bosses and investors, and Bank of England governor Andrew Bailey, he insisted that the BoE's independence was "sacrosanct" in the fight against inflation.
Capital Economics predict a price freeze would 'dramatically lower' the near-term path of inflation, and mean a less severe recession: "Rather than rise from 10.1% in July to around 14.5% in January, it may mean that inflation peaks around 11.5% in November and falls faster next year. The smaller drag on real incomes means that the recession may be shallower too, perhaps with a peak to trough fall in GDP of around 0.5% rather than 1.0%.
But, by supporting demand, it would boost inflation further ahead, potentially meaning higher borrowing costs: "As such, the risks to our forecast that interest rates will rise from 1.75% now to 3.00% are increasingly on the upside."
The European Central Bank could announce the largest interest rate increase in its history today, as it grapples with record inflation.
Economists predict the ECB could raise borrowing costs by 75 basis points, after the energy crisis drove up euro-area inflation to 9.1% in August, over four times above its 2% target.
The agenda
• 7.45am BST: French trade balance for July
• 11.30am BST: UK energy bill relief package announced
• 1.15pm BST: European Central Bank decision on interest rates
• 1.30pm BST: US weekly jobless figures
• 1.45pm BST: European Central Bank press conference
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