The pound’s fall after Friday’s mini-budget appears to have stalled for now, but only thanks to market expectations that the Bank of England will be forced to intervene.
The flight for sterling, which began after Chancellor Kwasi Kwarteng unveiled a £45bn tax cut plan
It essentially called into question the market’s confidence in sustainable UK public finances, raising the interest rates charged by investors for holding UK bonds – government promissory notes – used to fund the growth plan.
The pound hit All-time low against the dollar from $1.03 early Monday, but it later regained some lost ground and had settled around $1.08 by early Tuesday.
cost of living at the latest
There were three main factors in the limited comeback.
One was a Treasury Department statement Monday aimed at calming nerves surrounding Friday’s freebies.
It revealed that Mr Kwarteng was due to present a “medium-term financial plan” on November 23, which would also include an independent analysis from the Office of Budgetary Responsibility – a review that the mini-budget lacked.
The second came on the heels of a statement from the Bank of England, which reiterated it would “without hesitation” raise interest rates to support the value of sterling, but added that it would make a full assessment at its next scheduled meeting .
The final facet can be traced across the Atlantic, where the dollar — the world’s reserve currency, which has appreciated significantly this year amid economic turmoil surrounding Russia’s war in Ukraine — fell back against a basket of international currencies.
Analysts pointed to renewed investor interest in equities but remained cautious on the outlook as the turmoil in sterling and UK bond yields continued to unsettle markets already jittery at the prospect of longer US interest rates became.
There was some relief for the government as the Treasury successfully raised £1.2 billion through a bond sale on Tuesday morning.
The amount was matched 2.3 times, showing there was “no appetite” for the debt, according to Sky’s business and data editor Ed Conway.
Market volatility has been blamed for a number of cases Mortgage Providers Retiring Products from sale.
Given the turmoil of the past few days, such moves are likely to be temporary.
Many market participants spoke of a long way back for sterling’s recovery as credibility had been lost.
Allan Monks, an economist at America’s largest bank JP Morgan, said the bank’s and Treasury Department’s statements were “measured”.
“But there is still no clear sign that the root cause of the problem – the government’s fiscal strategy – is being reversed or reconsidered,” he lamented.
“This needs to happen before November to avoid a much worse outcome for the economy.”
Larry Summers, a former US Treasury Secretary, also spoke about the loss of credibility, suggesting that the crisis would affect London’s viability as a global financial center.
Seema Shah, chief strategist at Principal Global Investors, which has around $500 billion in assets.
“But as an investor you think long-term. If you look at the UK as a place to invest over five years, that’s a no to me.”
Others said another factor behind sterling’s performance since Monday afternoon is that money leaving UK bonds is finding its way into the currency instead – but only because of higher rate hike expectations.
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Victoria Scholar, head of investment at Interactive Investor, said markets were pricing in an emergency rate hike with hikes of 175 basis points (1.75%) through November.
“Sterling’s collapse could exacerbate the UK’s inflation problem as price levels are currently flirting in the double digits.
“More expensive imports could increase price pressures in the UK, likely to lead to more aggressive action by central bank policymakers.”
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