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Pound shrugs off economic gloom to hit six-week high as Sunak becomes PM

Sterling rises as Sunak victory in PM race offsets economic gloom
Sterling rises as Sunak victory in PM race offsets economic gloom Copyright Thomson Reuters 2022
Copyright Thomson Reuters 2022
By Reuters
Published on Updated
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By Amanda Cooper

LONDON -The pound hit its highest since mid-September on Tuesday, as investor gloom over Britain's economic outlook was temporarily offset by a glimmer of optimism over Rishi Sunak taking over as prime minister.

The 42-year-old former finance minister is now Britain's third prime minister in less than two months. Sunak said on Tuesday he would try to fix the mess left by his predecessor, restore trust in British politics and tackle a "profound economic crisis" but warned the country there would be difficult decisions.

Jeremy Hunt, who outgoing Prime Minister Liz Truss appointed as finance minister to replace Kwasi Kwarteng, will remain in post. His first task is likely to be presenting details on what remains of the Truss government's fiscal plan on Oct. 31.

Britain has seen its borrowing costs soar above those of far more heavily indebted nations, such as Italy or Greece, and the pound has hit record lows after Truss unveiled an economic programme that roiled financial markets and cost her job after just six weeks in office.

But the combination of Sunak and Hunt, along with a steep drop in European energy prices, gave investors reason enough to show some bullishness towards the pound, albeit temporary.

"Every new leader tends to get a honeymoon period and Liz Truss's didn’t last very long. The question will be how long does this honeymoon period last for Rishi Sunak?" Nomura strategist Jordan Rochester said.

"We assume he has a better understanding of financial markets than Liz Truss - with his background - and that he will allow Jeremy Hunt to continue this 'austerity budget' that we get next week on Oct. 31. This will please the market."

But the issue of double-digit inflation, slowing growth and a current account deficit of 44-billion pounds ($49.80 billion) will likely swamp the current optimism around the pound.

"There is a whirlwind of potential good news in the short term, but markets are not ignoring the fact that the medium-term story is slower global growth and the dollar will be in demand," Rochester said.

Sterling was last up 1.6% against the dollar at $1.1468, having risen earlier by as much as 1.92% to $1.150, the highest since Sept. 15. It rose 0.9% against the euro to 86.76 pence.

European natural gas prices fell sharply on Tuesday, thanks to a mix of warm weather and ample inventory.

The pound hit an all-time low of $1.0327 against the dollar in the wake of Truss' budget on Sept. 26. It has since recovered 11% in value, but is still down 16% so far this year against the dollar and around 4% lower against the euro.

Long-dated gilt yields, which were at the centre of the firestorm that scorched markets after the mini-budget, have almost returned to where they were before the release of the fiscal plan on Sept. 23, reflecting a greater degree of confidence among investors.

Volatility in the pound has collapsed since the mini-budget and is on track for a drop of 4 percentage points so far this month, although it is still well above its longer-term average.

Three-month volatility, a gauge of investor appetite, has dropped to around 12.45% from over 17% in late September. But that is still comfortably above the average 8.8% rate that has prevailed over the last five years, according to Refinitiv data.

"The former chancellor has a mammoth task ahead of him as he tackles the mounting economic crisis facing the UK and his warring political party," CityIndex strategist Fiona Cincotta said.

"In his first speech he said that economic stability and confidence is at the heart of his agenda. So far the markets have stabilised, trusting in the fiscally prudent leaders."

($1 = 0.8835 pound)

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