Sterling edges up on UK fiscal policy U-turn

Sterling inched cautiously higher following British Prime Minister Liz Truss’s partial reversal of her government’s economic plan.

The pound gained 0.42% to stand at $1.1225, after Truss said on Friday that Britain’s corporation tax will rise to 25% from April next year instead of keeping it at 19% as part of her government’s initial “mini-budget”.

The news came hours after she sacked former finance minister Kwasi Kwarteng, with Jeremy Hunt replacing him.

Hunt, a former foreign and health minister, has promised to win back Britain’s economic credibility by fully accounting for the government’s tax and spending plans, while insisting his boss Liz Truss remained in charge of the country.

Danni Hewson, financial analyst with AJ Bell, said the new Chancellor did strike a note of realism over the weekend, when he said difficult decisions will be needed “across the board”.

“What we’ve seen in early trading on Asian markets, the pound has rallied a little bit against the dollar which I think the Treasury will be pleased to see,” Ms Hewson said.

“It seems that he is resetting the clock, but what markets need now is to know which direction will be taken going forward. It’s all very well resetting back to where we were but at that point, markets and indeed people in the UK were crying out to know exactly how this country was going to manage a situation which is incredibly tricky with inflation rising high and people’s standards of living falling.”

Investors are now anxiously waiting to see what’s next for UK government bonds, after the Bank of England on Friday concluded its emergency gilt market support.

“If we do see a surge in gilt yields, then that would show that markets remain very skeptical about the debt sustainability in the UK,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

“I think sterling is likely to remain very volatile this week.”

Elsewhere, the dollar eased slightly today, providing some respite to the euro, the Aussie and the kiwi.

The euro was up 0.17% at $0.97395, while the antipodean currencies saw a slight rebound following last week’s slide to multi-year lows.

The Aussie gained 0.45% to stand at $0.6231, while the kiwi traded 0.35% higher at $0.55815.

“The USD remains dominant, and is likely to reassert, if not stamp, its superiority on any sustained challenges,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank.

Last week’s strong US inflation print has reinforced bets of another aggressive rate hike at the next Fed meeting, with markets pricing in a 90.9% chance of a 75 basis point rate hike, and a 9.1% chance of a 100 bp increase.

The US dollar index firmed at 113.12.

Meanwhile, the yen last bought 148.75 per dollar, not far off its 32-year low of 148.86 hit on Friday, on the back of rising US Treasury yields and the surging dollar.

Japanese authorities kept up their warnings to the market today of a firm response to overly rapid yen declines, after last week’s fall and meetings of global financial leaders that acknowledged currency volatility.

“There’s certainly a potential, it’s a question of when they make up their mind to do so,” said Moh Siong Sim, a currency strategist at Bank of Singapore, of another intervention.

Japan last month intervened to buy the yen for the first time since 1998, after the Bank of Japan stuck with ultra-low interest rates, which prompted the yen’s slide to 145.90 per dollar.

Article Source: Sterling edges up on UK fiscal policy U-turn – Author- RTE

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