By Barbara Kollmeyer
The British pound rose and gilt yields fell a second day after reports that U.K. Chancellor Kwasi Kwarteng will publish debt-reducing plans early, a day after a U-turn over widely criticized tax cuts for the wealthy.
Already under pressure, the chancellor found himself embroiled in fresh controversy after an interview in which he said “pressure” surrounding Queen Elizabeth II’s death last month had led to errors with the mini-budget that caused market upheaval.
In late afternoon London trading, the pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.6513% was holding onto gains, up 0.5% to $1.1387, bringing the currency well above the $1.12 level seen ahead of the Sept. 23 budget announcement that sent the currency crashing and bond yields soaring. The yield on the 10-year gilt yield /zigman2/quotes/211347177/realtime BX:TMBMKGB-10Y -1.15% was down 13 basis points at 3.826%.
The pound’s gains and dropping yields were boosted by a report in the Financial Times , the BBC and other U.K publications claiming Kwarteng would publish details early on how to fund the controversial tax cuts announced in the mini budget after previously saying he would wait until Nov. 23. But later in the day Kwarteng gave an interview to GB News in which he dismissed there would be any such early publication.
Those assets saw a similar reaction on Monday after the U.K. government said it would can plans to scrap the highest personal tax rate, cancelling one of the key components of a debt-funded budget that had roiled financial markets.
The pound was also rising on Tuesday against the backdrop of a falling dollar /zigman2/quotes/210598269/delayed DXY -0.40% , as investors piled into perceived riskier assets such as equities, with U.S. stocks opening sharply higher. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.07% saw its best session since June on Monday after weaker-than-expected U.S. manufacturing data that could mean the Federal Reserve eases up on its interest-rate hiking campaign sooner than later.
Kwarteng drew the ire of social media as he explained why the mini-budget appeared to be rushed together. “You have got to remember the context. What was extraordinary about that month was we had a new government and also we had the sad passing of her majesty Queen Elizabeth II,” he told GB News.
Analysts were wary of the pound’s strength, saying investors shouldn’t be lured into thinking the move was a vote of confidence in the government.
“It is true that sterling has had a mini-rally but, firstly, this was from historically weak levels to begin with and, secondly, the new value of sterling prices in steep rate rises which have been made necessary by the chaotic market response to the Chancellor’s economic growth plan. To be back where we were – but with a potential mortgage crisis now baked into the cake – is hardly a triumph,” said Seema Shah, chief global strategist at Principal Global Investor, in a note to clients.
“We will need to see the Fed easing again before we can be sure that the U.S. dollar is finally set to roll over,” added John Hardy, head of FX strategy at Saxo Bank.