The pound rallied more than 2% against the US dollar

GBP

Yesterday the pound rallied more than 2% against the US dollar, bolstered by risk-on mood and news that the UK government will abandon most of the economic plans put forward a few weeks ago which sent markets into turmoil and prompted the Bank of England to action an emergency intervention.

Jeremy Hunt, who was appointed as the new Chancellor last Friday, announced that he would reverse most of the tax cuts included in the “mini-budget” rolled out by his predecessor Kwasi Kwarteng as he tries to salvage fiscal credibility and straighten out public finances. The reversal suggests Prime Minister Liz Truss may be trying to make amends to convince investors that the country will be on a sustainable path moving forward and avoiding borrowing excessively to fund current policies at time of high inflation and a sizeable current account deficit.

USD

In the meantime, the prospect of a more aggressive policy tightening by the Federal Reserve acts as a tailwind for the US bond yields and the dollar, which further contributes to capping the pair GBP/USD. The markets seem convinced that the Fed will continue to hike rates at a faster pace to curb inflation and are pricing in a nearly 100% chance of another supersized 75 basis points increase in November. The bets were reaffirmed by last week’s stronger US CPI report and the recent hawkish comments by several Fed officials.