Sterling continued to rally on Tuesday after bouncing back to levels before the UK Chancellor Kwasi Kwarteng’s mini-budget announcement.
It was last trading at $1.1363, more than 10 percent up since the mini-budget.
The dollar slid against a basket of major currencies, as the euro and the pound made upward headway and Treasury yields slipped in light of a shift in investor expectations for the path of U.S. interest rates.
It comes after the chancellor abandoned his plan to abolish the top rate of income tax and amid speculation that he was planning to bring forward his medium-term fiscal plan.
Abhilasha Dafria, CEO of investment firm Angels Den, told The Epoch Times that the tax policy U-turn restored “some confidence” in the government’s fiscal policy.
In his mini-budget announcement on Sept. 23, Kwarteng said the government’s plan to subsidise part of the soaring energy bills for households and businesses will cost £60 billion ($68 billion) in the next six months.
He also announced £45 billion ($51 billion) in tax cuts in a bid to allow economic growth, including a controversial move to abolish the top rate of income tax—which the Treasury estimated would cost around £2.36 billion ($2.6 billion) next year.
But Kwarteng didn’t include any spending cuts or a forecast from the Office for Budget Responsibility in his statement.
The package was to be funded by £62.4 billion ($70.7 billion) of additional bond sales and £10 billion ($11.3 billion) of Treasury bill sales.
Bond yields rocketed following Kwarteng’s announcement, prompting the Bank of England to buy gilts to stabilise the market.
The pound had been falling before the chancellor’s mini-budget but suffered a steeper fall following the announcement, although other major currencies also fell sharply against the U.S. dollar.
In an email to The Epoch Times, Dafria said she believes a number of factors had driven down the value of the pound, including the extra spending in the chancellor’s mini-budget.
“This makes macro investors uncomfortable and they demand more risk premium for holding [pound] assets,” she said.
She also said the U.S. Federal Reserve’s hiking of interest rates had been causing a broad-based U.S. dollar rally as “all central banks have been behind the curve in this hiking cycle to fight inflation.”
The U-turn on the relatively small top-rate income tax policy contributed to the pound’s recovery because “in an extremely bearish sentiment/positioning, even the slightest positive news is sufficient for a bounce back in any asset,” Dafria said, adding that the mini-budget focuses on “giving full incentive to business owners who can help the country to grow as a whole,” and has further strengthened the UK’s world-leading environment for start-up investment.
She also said the success of the government’s politically “tough reforms” should not be measured by short-term reactions in the pound market, citing a similar short-term reaction of the currency to former Prime Minister Margaret Thatcher’s reforms, which she said had been proven “much needed for [the] UK’s success as a centre of global business.”
While Kwarteng’s mini-budget contained a £60 billion energy freeze and £45 billion of unfunded tax cuts, much of the criticism was focused on the abolition of the top rate of income tax and the removal of bankers’ bonus caps.
The moves were seen as being insensitive when lower-income households are struggling over high energy prices and inflation.
On Monday, Kwarteng abandoned the plan of abolishing the top rate of income tax following intense backlash from opposition parties and the Conservative Party’s own backbenchers, saying the plan had become “a massive distraction on what was a strong package.”
He also told the Conservative Party conference on Monday that he would publish “shortly” a medium-term fiscal plan—which will set out the government’s plan to reduce the debt-to-GDP ratio—having previously said the plan won’t be published until Nov. 23.
