Pound Sterling Dips then Recovers Slightly from Intra-Day Highs as Chancellor Kwarteng Sacked, Truss Remains Extremely Vulnerable
Prime Minister Truss has sacked Chancellor Kwarteng in an attempt to reinforce her position and there will be a further U-turn on fiscal policy with strong expectations that the corporate tax increases will now go ahead rather than being scrapped.
There will be intense political debate during the weekend with Truss seen as extremely vulnerable.
The Pound to Dollar (GBP/USD) exchange rate dipped to lows around 1.1170 after Kwarteng’s dismissal before a rebound to 1.1280 as the dollar retreated sharply from earlier highs.
The Pound to Euro (GBP/EUR) exchange rate dipped to 1.1500 before a recovery to 1.1530.
Susannah Streeter of Hargreaves Lansdown noted; “Since his departure was made clear, 10-year gilt yields have edged up slightly and the pound fell below $1.12, with no fresh euphoria in sight as markets digest another bout of political upheaval.”
The 10-year gilt yield traded close to 4.00% from intra-day lows at 3.90% and the overall mood in markets is more composed.
Greater stability in bonds should limit scope for renewed Sterling selling, but economic credibility will be crucial.
Kwarteng Sacked, Hunt Takes Over in Reset
Ahead of the New York open it was confirmed that Chancellor Kwarteng had been sacked and Prime Minister Truss will hold a news conference at the Wall Street open.
There was a further shake-up with chief Secretary to the Treasury Philp also leaving government.
Former Health Secretary Hunt has been appointed as the new Chancellor with markets wanting a new fiscal plan as soon as possible.
Senior Tories call Truss Position Untenable
Prime Minister Truss is battling to survive, but, given her close ties to the fiscal policy, her position is extremely weak.
There has been strong speculation of a concerted move by senior party members to force her resignation, although there will be strong resistance to any formal leadership contest which complicates the issue.
Credit Suisse head of UK economics Sonali Punhani remained uneasy over the economic outlook; "Owing to the market turmoil that has followed the announcement of the mini-Budget, risks are rising that the recession in the UK is deeper than we forecast.
She added; "If the market moves are sustained or worsened, they can offset the impact of the tax cuts and increase the depth of the recession through much higher mortgage costs and currency-led inflation."
Jeffries analyst Mohit Kumar, commented: "We have maintained throughout the last few weeks that the current crisis in the UK is a political one and hence the solution needs to come from politics.
He added; "We still need to get the details of the U-turn, but the government’s action should take some pressure off the gilt market and the BOE."
Saxo Sales Trader Mike Owens, added: "This historic U-turn could bring some joy to the market, though act as a warning and increase uncertainty over further short term change of hearts, which will continue to see the economy travel down Liz Truss' political helter skelter.”
Hargreaves Lansdown’s Streeter added; “For now the Prime Minister has won breathing space, but the financial markets are highly sensitive and anything less than a co-operative approach with the Bank of England, the Office of Budget Responsibility and international institutions could cause fresh instability.”
According to HSBC; “The risks to GBP remain to the downside as it will take time for confidence to return, and some of the current weakness is also a consequence of the continued strength of the USD. Against a broader basket of currencies, GBP hasn’t yet reached previous lows, which it could test as the economic climate becomes more strained.”