The pound slumped against the US dollar today, slicing some of the gains it has made since the currency collapsed after Kwasi Kwarteng’s mini-budget last month.
Sterling weakened as much as two per cent against the greenback. It was down against the euro too.
The world’s major currencies have tumbled against the dollar this year.
The pound notched thinner losses during early exchanges in the City. However, its fall accelerated after prime minister Liz Truss’s speech at the Conservative Party conference.
Pound/US dollar exchange rate
She has pledged to deliver a pro-growth agenda, but the early days of her premiership have been mired by markets scrutinising her government’s financial credibility after.
Sterling yesterday climbed to a two-week high against the dollar after the government tried to soothe market jitters over its tax cutting and borrowing splurge.
Treasury officials confirmed yesterday chancellor Kwarteng will earlier than first expected set out more details on his plans to shore up the public finances to help absorb £43bn worth of tax cuts and more debt to fund the energy bill freeze.
The likely ‘second mini-budget’ will be accompanied by the Office for Budget Responsibility’s independent forecasts breaking down the impact of the government’s plans on the UK’s debt pile.
It is unclear when the plans and report will be published, but it is likely to be later this month.
Sterling is trading above levels notched before Kwarteng’s first mini-budget on 23 September. It plunged to a record low against the dollar last month.
Despite the rally, analysts are downbeat on the currency’s prospects.
“The pound has recovered, but we think its large current account deficit, among other factors, will push sterling lower,” Jonas Goltermann, senior markets economist at Capital Economics, said.
Britain runs a wide trade deficit, meaning it imports more than it exports. To bridge that gap, it borrows money from international investors. That reliance on foreign borrowing puts downward pressure on the pound.
UK bonds snapped a winning streak and plunged early today, sending yields higher. The two move inversely.
However, gilts rallied slightly in the afternoon, curbing rate increases.
Last week, the Bank of England was forced to intervene in the UK bond market to tame surging debt costs.
It said it will buy as much as £65bn of long-dated government debt until 14 October. It has purchased much lower than the maximum amount.
Rates are being driven higher by a combination of investors demanding a higher return to buy more government debt, inflation in the UK hitting a 40-year high and expectations of further rate hikes from Bank governor Andrew Bailey and co.
London’s FTSE 100 finished 0.48 per cent lower.