Pound edges higher in morning trading after hitting record low against dollar

The pound rose in European morning trading on Tuesday after hitting a record low against the dollar, recovering slightly after the Bank of England and UK Treasury sought to calm rattled markets.

Sterling was up 1.2 per cent at $1.082 in recent trading, just a day after the currency tumbled almost 5 per cent to a record low of $1.035 after the UK chancellor Kwasi Kwarteng vowed to pursue more tax cuts.

The gains, which still leave the pound around the lowest levels since 1985, came after Kwarteng attempted to calm markets with a co-ordinated statement with the BoE, vowing to accelerate development of a strategy to bring UK debt under control.

The UK central bank also said it would “not hesitate to change interest rates” to rein in inflation, but stopped short of an emergency interest rate increase to prop up the currency.

The rise on Tuesday still left the pound down about 20 per cent against the dollar in 2022, putting it in contention for the worst performer among G10 currencies this year, running neck and neck with Japan’s yen.

Analysts said global investors were focused on the dent to the UK’s credibility delivered by the government’s new fiscal policy, announced on Friday, which would combine £45bn of tax cuts with a huge wave of new borrowing.

“There is still no clear sign that the source of the problem — the government’s fiscal strategy — is being reversed or reconsidered,” said Allan Monks, an economist at JPMorgan.

Monks added that unless Kwarteng delivered a more concrete plan to stabilise the situation, “the BoE will be forced to validate market rate expectations or else risk delivering a dovish disappointment, which ends up raising longer-term inflation expectations”.

UK government debt prices also ended Monday lower, pushing the 10-year yields up to more than 4.2 per cent, compared with about 3.5 per cent before tax cuts were announced. Two-year gilt yields, which are more sensitive to rate expectations, finished the session at nearly 4.4 per cent.

Although traders pulled back from bets that the BoE would announce a surprise rate rise, markets were pricing in a 1.5 percentage point increase from the UK central bank, to 3.75 per cent, in November.

Gilt prices rose in early dealings on Tuesday, with the 10-year yield dropping 0.19 percentage points to 4.07 per cent, but the debt instruments were still on track for historic monthly declines.

UK high street banks have also begun pulling mortgage loans in response to rising gilt yields, with mortgage rates expected to rise substantially.