Pound back where it was before Kwarteng shock as traders rethink

The sterling has rallied almost 8% from its all-time low of of $1.0350 set early on Monday to trade at $1.1168 in early Asian trade – about the same level it was at before the Chancellor of the Exchequer began speaking in parliament about the government’s mini-budget almost a week ago. The Bank of England’s bond purchases and the stabilisation of gilts yields were a big factor in soothing investor fears, strategists say.         

“It’s a reminder that currencies are driven by a myriad of factors – it’s clearly not due to any improvement in the outlook for the UK,” said Sean Callow, strategist at Westpac Banking Corp in Sydney. “The pound does at least have much stronger yield support now. Loose fiscal policy is often supportive for currencies to the extent that it can force tighter monetary policy.”

Sterling closed 3.6% lower last Friday as markets digested the reduction of levies on rich households and companies in a bid to boost economic growth. The currency then tumbled as much as 4.7% in early Monday trade amid concern the proposals estimated at about £161-billion (R3.22-trillion) over a five-year period would lead to faster inflation and a spiralling government debt burden. 

The central bank stepped in on Wednesday, pledging unlimited purchases of longer-maturity bonds, after the selloff threatened to push the gilt market into a downward spiral and spark a pension-fund crisis. BM/DM