Pound Reached Its Highest Point Since Before The Mini-budget
As a result of investors' positive reaction to the appointment of Rishi Sunak as Prime Minister and the decline in the value of the dollar, the pound reached its highest point since the middle of September.
On Tuesday, sterling rose 1.9% to $1.149, the highest level since before Liz Truss's mini-budget.
Government borrowing costs have also returned to where they were last month, providing relief to Mr Sunak, who took charge on Tuesday. In recent weeks, financial markets have been roiled by concerns about the economy.
Mr Sunak warned the country today that it was facing a "deep economic catastrophe" with "tough decisions" ahead. Experts believe the pound's rise is due in part to a "relief rally" following Mr Sunak's appointment, but also to the dollar's weakening.
The US dollar fell on Tuesday after statistics revealed a pause in US house price rise and a reduction in US consumer confidence. The dollar is losing momentum today across the board, said Jeremy Stretch, head of FX Strategy at CIBC.
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However, there is no doubt that there is a relief rally here in terms of seeming stability in the macroeconomic picture since Sunak's arrival. Five ways a weakening pound may affect you. In the aftermath of former Prime Minister Liz Truss's mini-budget, sterling fell to a record low versus the dollar, and government borrowing prices soared substantially.
Investors were alarmed after then-Chancellor Kwasi Kwarteng promised big tax cuts without specifying how they would be paid for - something Mr Sunak warned about during the Tory leadership election this summer.
Mr Sunak, a former hedge fund manager, is viewed favorably by investors and has promised to correct "mistakes" committed during Liz Truss' leadership.
New Chancellor Jeremy Hunt, who reversed almost all of Ms Truss' tax cuts, will remain in the new cabinet and is expected to lay out his tax and spending strategy on October 31. Shevaun Haviland, director general of the British Chambers of Commerce, warned on Monday that the UK "cannot afford to witness any more policy flip-flopping."
The recent political and economic uncertainty has been enormously harmful to British company confidence and must immediately end, she said. On Tuesday, government borrowing costs returned to levels seen shortly before the mini-budget, with the interest rate - or yield - on 30-year bonds falling to 3.6%.
Meanwhile, the yield on five-year bonds, which underpins the cost of new five-year fixed-rate mortgages, declined to 3.7%.
Yields are still far higher than they were this summer, but the drop will be welcomed by the government, whose September borrowing figures were the second highest on record.
Mortgage holders will also be hoping that it filters through to the mortgage market, where rates have reached 14-year highs following the recent turbulence.
Sir Dave Ramsden, the Bank of England's deputy governor for markets and banking, said on Monday that recent drops in government borrowing costs demonstrated that "credibility is returning to British economic policy."
People Also Ask
Why Is The Pound Falling In Value?
Higher energy prices have had a considerable negative external shock on the UK economy, weighing on growth prospects as a larger share of income is spent on energy expenses.
Will Pound Get Stronger In 2023?
The relative decline in UK inflation in 2023 should strengthen the pound, mitigating the undervaluation anticipated by the Big Mac Index.
Why Is The British Pound So Strong?
Interest rates are the primary driver of the pound's strength. Typically, the two go hand in hand: the higher a country's interest rate, the more appealing the currency is to foreign investment, which strengthens the pound.
Final Words
Despite the improved picture, experts warned Mr Sunak that difficult times lay ahead. The former chancellor faces a monumental assignment as he handles the UK's increasing economic crisis and his divided political party, CityIndex strategist Fiona Cincotta said.
According to Jordan Rochester, a Nomura strategist, every new leader experiences a "honeymoon period." Liz Truss's did not last long. The question is, how long will Rishi Sunak's honeymoon period last?
About The Authors
Hilda Workman - Hilda Workman is a licensed financial advisor with years of expertise in the industry. She has assisted a range of clients, from sole proprietors to large corporations, in reaching their financial objectives. She is informed about many different financial subjects, including tax preparation, investment planning and also in fashion. She believes that the best things are those that are imperfect.
