City workers walk near the Bank of England in the City of London on Monday, 3 October 2022. 
Investors are concerned the withdrawal of BOE support will throw the market into further disarray, with pension funds calling for the measures to be extended. On Wednesday, the BOE was forced to reiterate that bond purchases will end this week, surprising some traders. The Financial Times also reported that officials had briefed bankers privately that they could extend the deadline.
“Anything is possible in the helter-skelter world of UK policy making,” said Kit Juckes, chief currency strategist at Societe Generale SA.
The pound strengthened 1%, bucking the overall risk-off mood in UK markets Wednesday.
Ever since Chancellor of the Exchequer Kwasi Kwarteng announced a vast package of unfunded tax cuts last month, UK market have been extremely volatile. Collateral calls from leveraged liability-driven investor strategies fueled disorderly trading in government bonds, particularly longer-dated and inflation-linked gilts.
In response, the BOE has made increasingly large interventions to protect financial stability. This week it expanded the amount of gilts it could buy in a given operation and expanded purchases to inflation-linked debt after a record selloff.
Even after Bailey’s firm words, some analysts say they’re sticking to their view that BOE will step in if market conditions don’t improve.
BOE Warns Households May Face Strain Similar to Pre-2008 Crisis
“Bailey’s words did sound harsh but from the BOE’s perspective they need to sound stern,” said Pooja Kumra, rates strategist at Toronto-Dominion Bank. “The BOE has been very receptive to markets. If chaos continues we doubt that they will run away.”
While the pound’s gains are coming off of a five-day losing streak, some traders pointed to a report from Politico about a potential deferral of government tax cuts and possibly a further windfall tax.
There’s “a lot of potential positive good news sentiment if Truss does a U-turn on corporate tax cuts, stamp duty,” said Jordan Rochester, a currency strategist at Nomura International Plc. “Macro factors are still pointing to a trend lower,” he added.