Government U-turn on tax helps Sterling recovery

GBP

The pound recovered yesterday after the Chancellor Kwasi Kwarteng confirmed he would bring forward the publication of his fiscal plan to try to restore confidence in the market. The plan had originally been scheduled for release on the 23rd of November, but will now be delivered later this month. The Treasury’s plan will also be accompanied by the Office for Budget Responsibilities’ crucial full set of economic forecasts.

The Chancellor also announced a dramatic U-turn reversing the 45p income tax give away measure, which helped Sterling regain some of its losses from last week against the euro and the US dollar. Against the euro, the pound was up by as much as 1.15% and by 1.50% against the dollar.

This change of course for higher earners helped to calm the markets and reduced the likelihood that the Bank of England will need to be even more aggressive with interest rates. However, the market still anticipates at least a 100 basis points interest rates rise at the BoE’s next meeting in November.

Sterling gains against the euro were also aided by the more conciliatory tone between the UK and the EU over the Northern Ireland issue. Both sets of officials have committed to resolve the issues promising to remove uncertainty for relations between the two trading blocs. Removing some of the obstacles to trade in the region will likely support the pound in the short term.

Key announcements

14:15 – USD – US FOMC Member Mester Speaks

15:00 – USD – US JOLTS Job Openings

16:00 – EUR – ECB president Lagarde speaks