United Kingdom

Pound bounces back after Government U-turn on tax cuts

Chancellor Kwasi Kwarteng’s mini-Budget sent the pound into freefall (Picture: EPA/Getty)

The pound has bounced back to levels seen before Kwasi Kwarteng’s mini-budget as the Chancellor was forced into a screeching U-turn on tax cuts for the rich.

Sterling surged to 1.13 against the US dollar at one stage overnight, recovering ground lost in the market turmoil, though it steadied back to 1.12 this morning.

The financial chaos saw the pound fall to an all-time low of 1.03 against the dollar amid fears over the Government’s unfunded tax cuts and wider economic policies.

Mr Kwarteng’s U-turn on axing the 45p tax rate for top earners also helped ease pressure on government bonds, known as gilts, with yields on the bonds seeing further steep falls today.

The Bank of England was forced to step in last week with an emergency gilt-buying programme to halt a sell-off in the market that had left some pension funds on the brink of collapse.

But the FTSE 100 Index remained under pressure, falling nearly 1% soon after opening this morning.

Chris Turner, global head of markets at ING, said the pound looks to have been saved for now from hitting parity against the dollar.

Chancellor Kwasi Kwarteng was forced into a major U-turn on tax cuts for the rich (Picture: Reuters)

He said: ‘This move is rather symbolic, being less about the amount of money it will save (low billions) and more about the poor signal it had delivered of ideological (unfunded) tax cuts.

‘This does alleviate the risk of cable (pound versus US dollar) trading to parity in that it shows Downing Street will show greater respect to financial markets when considering policy options.’

It comes after ratings agency S&P became the latest to deliver a blow to the fledgling Government, downgrading its outlook on the UK from stable to negative.

George Lagarias, chief economist at Mazars, said: ‘The Chancellor’s forced U-turn should take some pressure off the pound, for the time being.

‘Still, the UK has lost some credibility with international markets over the past few years.

‘Despite the pound’s currency reserve status, British risk assets have a long and difficult way before they return as a staple in the portfolios of international long-term investors.’

The pound is still down by more than 17% since the start of the year, adding to the cost-of-living crisis by making it more expensive to import goods, commodities and services.

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