Sterling rallied this afternoon after the prime minister’s Cabinet reshuffle was thrown into disarray by the resignation of chancellor Sajid Javid.
The pound fell against the dollar following Javid’s surprise departure, which came after the chancellor refused to fire two of his special advisers.
But it swiftly bounced back to trade up 0.5 per cent at 1.3029 after Javid’s deputy Rishi Sunak was appointed to the top job at Number 11.
The rise marked sterling’s highest level against the dollar in a week, while against the euro it broke through the key €1.20 mark.
“The surprising resignation of Sajid Javid as chancellor, and his replacement by Rishi Sunak, implies that Number 10 will now exert greater influence over the Treasury,” said Michael Brown, senior market analyst at Caxton.
“This has led markets to believe that more expansionary fiscal policies — including increased infrastructure spending — are likely to be delivered in next month’s Budget.”
Ranko Berich, head of market analyst at Monex Europe, said the pound’s positive reaction “does look a bit puzzling”.
However, he agreed that the most plausible explanation was tighter control by Boris Johnson over fiscal policy, which he said could lead to a “Trumpian spending spree”.
The move will spark greater speculation over the government’s Budget, set to be unveiled on 11 March.
“March’s budget was already expected to feature significant spending commitments, but today’s events have raised expectations even further,” Berich added. “Expect this to be a red-letter day for UK markets and sterling.”