The pound pushed higher on Monday morning after the government said it would scrap its planned 45p income tax cut, while the markets dipped in response to the dramatic news.
Sterling leapt by as much as one per cent against the US dollar to $1.12 early on Monday morning while teetering back slightly after a decision was announced by Chancellor Kwasi Kwarteng.
The pound then erased all its gains against the dollar, falling back to around $1.1179 later in the morning.
London’s FTSE 100 fell sharply this morning in response to the Government’s dramatic income tax U-turn.
The capital’s premier index fell by 47 points this morning to 6,846.43, while the more domestically focussed FTSE 250 fell 76 points to 17,092.01, as investors lost confidence in the UK.
This comes after the pound rose above $1.12 this morning in response to the U-turn, from about £1.10 earlier in the morning.
In response to the Chancellor’s mini budget, the Pound initially slipped to $1.03.
Last week, the Bank of England made an historic intervention as the currency continued to slip, pledging to buy-up £65bn in bonds, stabilising the market.
The gilts market continued to steady with prices rising and yield falling. The 10-year gilt yield dropped 0.03 points to 4.05 per cent, while yields increased on 30-year gilts, up 0.003 points, to 3.8 per cent.
The government announced this morning it will to row back on the policy following vocal opposition from former cabinet ministers Michael Gove and Grant Shapps.
Posting a statement on social media this morning, Kwasi Kwarteng told critics, it is , “clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country.”
Markets reacted with volatility as Kwarteng met business leaders and big banks last week in a bid to reassure them of his policy, as the pound neared parity with a strong dollar.
“The Prime Minister was hoping to carve out a reputation as the new Iron Lady, instead she will be seen as highly malleable,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said on Monday.
The Prime Minister had been “manipulated” into the retreat after top Tories had opposed the tax cut, resulting in an “embarrassing climb down,” Streeter added.
However, the policy switch-up would “help reassure the markets a little that the more reckless nature of this new administration can be reined in by the Conservative party.”