Stock Market

Pound gets a respite, moves back toward pre-budget levels

The British pound advanced on Friday after the government agreed to met with the country’s independent budget experts.

The pound
GBPUSD,
+0.53%

reached as high as $1.1209 in Asia, and was last changing hands at $1.1198. The currency traded around $1.1254 on Sept. 22, a day before Chancellor of the Exchequer Kwasi Kwarteng announced that support for rising energy bills and a wave of tax cuts would require the issuance of £62 billion in government bonds.

Alongside pound gains, U.S. stock futures
ES00,
+0.65%

NQ00,
+0.57%

YM00,
+0.54%

were also rising.

Some analysts credited the pound’s move to an emergency meeting that’s expected Friday between newly appointed Prime Minister Liz Truss and Kwarteng and the head of the Office for Budget Responsibility (OBR), Richard Hughes, according to the Guardian and other newspapers.

“Separately the Times and Telegraph report that the government is planning to increase benefits in line with wage growth rather than inflation, a measure the Times suggests will save £5 billion ($5.5 billion),” said RBC’s global market strategist Peter Schaffrik and senior associate rates strategist Megum Muhic, in a note to clients.

Kwarteng, meanwhile, has been criticized for not commissioning budget experts on that mini budget. While the Treasury has claimed there wasn’t enough time, the OBR confirmed in a letter to Ian Blackford MP and Chair of the Treasury Select Committee Mel Stride that it offered those forecasts on time and up to the standards needed.

Truss has been under fire since the U.K. government’s unfunded tax cuts more than a week ago sank the pound and sent bond yields soaring, spilling over to global financial markets. The turmoil was curtailed on Wednesday when the Bank of England said it would buy bonds at “whatever scale is necessary” to restore orderly market conditions.

Read: IMF scolds U.K. on fiscal plan that has upset financial markets

The yield on 10-year U.K. government bonds
TMBMKGB-10Y,
4.049%

has pulled back by around 34 basis points since the central bank’s intervention. That yield was last down 1 basis point to 4.008%.

“I genuinely believe that sterling could recover sustainably if the BoE plays a good game,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a note to clients.

“The BoE has a very hard task now: it must deal with the globally higher inflation – which requires a tight monetary policy, and it must deal with Liz Truss — and her spending that the market doesn’t want to finance — which requires the BoE buying bonds.” 

The analyst said the central bank will likely compensate those bond buys with steeper rate hikes.

“Investors now expect 125-150bp hike at the BoE’s next meeting. And [Bank of England Gov. Andrew] Bailey has no choice but to deliver, if he wants to gain investors’ confidence — that the government lost big time,” said Ozkardeskaya.

Also Friday, economic data revealed U.K. gross domestic product rose 0.2% in the second quarter compared with the first three months of the year, slightly better than the 0.1% contraction previously estimated, the Office for National Statistics reported Friday.


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