Sterling On the Rise After UK Government Announced Plans to Adjust Budgetary Plans

Following news of a potential U-turn by the UK government on its budgetary policies, the Sterling (GBP) jumped to a one-week high until robust US inflation data tempered some of those gains. that said, the pound maintained a steady bias despite raging market dynamics on Thursday.

After Sky News reported that the British government is considering making adjustments to the budget plan unveiled last month, the pound increased as much as 1.8% against the dollar (USD). The reports also increased the value of UK bonds and stocks.

Sterling Gains Capped by US Inflation Data

Price pressures increased last month more quickly than anticipated, according to a reading of consumer inflation in the United States. This increased expectations for additional, substantial rate increases by the Federal Reserve, which strengthened the dollar and weakened the bullish momentum around the pound.

The market is anticipating Friday when the Bank of England’s emergency debt support program will come to an end.

Although Bank of England Governor Andrew Bailey has stated categorically that the central bank will stop buying emergency bonds on Friday, market participants remain skeptical about whether the BoE’s program will need to be extended to calm the economic turbulence.

The BoE is expected to adhere to its deadline on Friday, according to Adam Cole, head of FX strategy at RBC Capital Markets. Until then, the pound is in a holding pattern. Cole noted:

“I don’t think anyone has any idea of how the market is going to react, so we will wait and see how gilts open on Monday … and take our cues from that.”

After reaching its highest level since 2008 on Wednesday, the yield on Britain’s 20-year gilts decreased on Thursday. According to Chris Turner in an investors’ note, “The risk of a cliff-edge in the gilt market remains for Monday, and in this environment, we doubt many investors would want to go near sterling.”

According to a study released on Thursday, Q3 2022 saw the steepest decline in mood in the UK financial sector since 2019. Following six previous rate increases, investors are fully pricing in a 100 basis point rate increase from the BoE at its November meeting as the central bank scrambles to curb skyrocketing inflation without accelerating an economic slowdown.