The pound rose the most in two years to surpass $1.13; Jumping gilts
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The pound rose the most in more than two years, buoyed by reports that UK government officials are working on a reversal of the sweeping tax cuts proposed by Prime Minister Liz Truss.
The British pound climbed 2.4% to trade above $1.13, which is expected to be the best performing major currency this week as the dollar sags. UK bonds also rallied, with the yield on 30-year debt falling as much as 46 basis points on bets that fiscal changes would improve the country’s debt sustainability.
“Has the government finally answered the calls of the markets and the Bank of England? The price action of gilts and the pound suggests that the markets think so,” said Simon Harvey, head of currency analysis at Monex Europe. If Truss reverses policy, “we are finally looking at a potentially more fundamental basis for traders to go bullish on the pound,” he added.
The sharp moves are the latest turmoil to hit UK markets since Chancellor of the Exchequer Kwasi Kwarteng unveiled a package of tax cuts last month that would likely weigh on public finances. Growing criticism from other lawmakers and dwindling support in election polls have also put pressure on the government to make adjustments to the policy.
UK No 10 and Treasury officials are discussing how they can waive the tax cuts package, according to a person familiar with their conversations. Officials are drafting options for Truss but no final decision has been made and they are waiting for Kwarteng to return to London from Washington, the person said, asking not to be identified commenting on private discussions.
The market rally began on Wednesday after data showed the Bank of England had taken on £4.56 billion ($5.2 billion) in long-term, inflation-linked debt. It then bought a record £4.68bn of assets on Thursday, bringing total purchases over the past two weeks to £17.8bn.
BOE buys another £4.68bn of bonds as end of program nears
Traders briefly priced less than 100 basis points from the BOE’s hikes in its next rate decision in November – the first time this has happened since the announcement of the mini-budget. They had bet up to 116 basis points earlier.
Markets “feel reassured by the relatively larger size the BOE has taken on,” said Imogen Bachra, head of UK rates strategy at NatWest Markets.
Regardless of what happens to Truss’ policies, investors should still be wary of betting on the pound, according to Adam Cole, strategist at RBC Capital Markets. He said he would look to sell the currency above $1.13.
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