GBP/EUR Rate Hits One-Month Best on News "Mother of All U-turns" Incoming

Above: File image of Prime Minister Liz Truss and Chancellor Kwasi Kwarteng. Picture by Rory Arnold / No 10 Downing Street.

Talk of a u-turn by the UK government that would overturn their 'mini budget' announced in September could be driving Thursday's strong rally in the British Pound.

The Pound was a clear outperformer in global FX on a report that, "UK officials at No. 10 and the Treasury are discussing how they can back down from Prime Minister Liz Truss’s plans for a massive unfunded package of tax cuts".

A Bloomberg story on the matter quotes "a person familiar with their conversations".

But the story is repeated by Sky News: "officials in Downing Street are working on a U-turn on Liz Truss's tax plans, but no decisions will be made before Chancellor Kwasi Kwarteng gets back from the IMF in Washington."

The Pound is materially higher on a day-on-day basis as a result of the reports:

Above: GBP/USD (top) and GBP/EUR (bottom) at 30-minute intervals. To better time your payment requirements, consider setting a free FX rate alert here.

Nicholas Watt, Political Editor at BBC Newsnight, is also reporting of a shift in position by the government, which has thus far committed to maintaining a series of unfunded tax cuts:

"A former cabinet minister tells me: 'Brace for the mother of all U-Turns on the mini budget today. A friendly person in the know is advising us to steer clear of the media today to avoid the explosion. We wouldn’t want to look silly by tomorrow'".

The Pound to Euro exchange rate is higher by a percent on the day, taking it to a one-month best of 1.1560.

This takes bank payment rates to around 1.1330 and those at independent payment providers to approximately 1.1525.

The Pound to Dollar exchange rate is at 1.1264 following a 1.50% move, its highest in a week. The best rate we are seeing on international payments is now around 1.1037.

UK bond yields surged following the announcement of a raft of tax cuts and the cancellation of a planned hike to corporation taxes in 2023.

While tax cuts can be pro-growth they come at a time of falling economic activity and raised spending, leaving investors concerned about the stability of UK finances.

Already the government has u-turned on one element of the 'mini budget' as it abandoned a plan to remove the 45p income tax threshold.

The Pound rallied on the 45p u-turn news, confirming there does exist a market reaction function to any reversal of the policy.

"We are currently witnessing another GBP short squeeze as markets increasingly speculate upon the prospect of either a U-turn on some or all of the fiscal measures or alternatively the prospect of a challenge to the leadership of Prime Minister Truss," says Jeremy Stretch, a currency analyst at CIBC Capital Markets.