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Pound Bucks a Global Market Selloff With Rally Back to $1.12

The pound and gilts surged on reports that UK officials are working on a U-turn of the sweeping tax cuts proposed by PM Liz Truss.

Pound Bucks a Global Market Selloff With Rally Back to $1.12
Pound Bucks a Global Market Selloff With Rally Back to $1.12

The pound is set to be the best-performing currency among Group-of-10 peers, buoyed by reports that UK government officials are working on a U-turn of the sweeping tax cuts proposed by Prime Minister Liz Truss.

Sterling rallied as much as 1.8% to $1.1295, before paring some gains as the dollar surged in the wake of a hotter-than-expected US inflation print. Bonds also advanced, with the yield on 30-year bonds dropping as much as 46 basis points to 4.36%.

Traders also briefly priced in less than 100 basis points of hikes by the Bank of England at its next rate decision in November -- the first time that’s happened since the announcement of the mini-budget. They had been wagering on as much as 116 basis points earlier.

“Has the government finally heeded the calls from markets and the Bank of England? Price action in gilts and the pound suggests markets believe so,” said Simon Harvey, head of FX analysis at Monex Europe. 

If Truss does reverse her policy, “we are now finally looking at a potentially more fundamental basis for traders to turn bullish on the pound,” he added. 

Pound Bucks a Global Market Selloff With Rally Back to $1.12

Market confidence in the UK had been rattled ever since Chancellor of the Exchequer Kwasi Kwarteng unveiled a package of tax cuts that would likely strain public finances. Growing criticism from other Conservative lawmakers and waning support in the polls had also been piling pressure on the government to make adjustments to policy. 

UK officials at No. 10 and the Treasury are discussing how they can back down from the package of tax cuts, according to a person familiar with their conversations. The officials are drafting options for Truss but no final decision has been taken and they are waiting for Kwarteng to return to London from Washington, the person said, asking not to be identified commenting on private discussions.

WATCH: UK officials are drafting options on ways to back down from Prime Minister Liz Truss’s massive package of unfunded tax cuts.Source: Bloomberg
WATCH: UK officials are drafting options on ways to back down from Prime Minister Liz Truss’s massive package of unfunded tax cuts.Source: Bloomberg

The recovery in UK gilts started late on Wednesday after data showed BOE had snapped up £4.56 billion in long-dated and inflation-linked debt, the biggest round of emergency purchases yet. That brought the total purchases to a little over £13 billion.

Markets are “feeling comforted by the relatively larger size that the BOE took down in yesterday,” said Imogen Bachra, head of UK rates strategy at NatWest Markets. 

Regardless of what happens to Truss’s policies, investors should still be wary of betting on the pound, according to Adam Cole, a strategist at RBC Capital Markets. He said that he would be looking to sell the currency above $1.13.  

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