Pound Sterling Rally Extends after Kwarteng Comfirms Fiscal Plan Will be Brought Forward

Above: Chancellor of the Exchequer, Kwasi Kwarteng delivers his speech to the Conservative Party Conference in Birmingham. Picture by James Whatling CCHQ / Parsons Media. Image © Parsons Media.

The British Pound received another boost after Chancellor of the Exchequer Kwasi Kwarteng said he was bringing forward the publication of his fiscal plan, in an effort to win back market confidence.

The plan was scheduled for release on November 23 but it was reported late Monday the plan would now be delivered later this month.

Crucially, the plan will be accompanied by a full set of forecasts from the Office for Budget Responsibility (OBR).

"Falling Gilt yields and stronger GBP this morning illustrates repair job an OBR forecast, medium term fiscal plan," says Simon French, Chief Economist at Panmure Gordon.

The developments helped secure a late-session rally in Pound Sterling on Monday, ensuring the Pound to Euro exchange rate rose 1.15% on Monday and the Pound to Dollar was higher by a 1.50%.

Chair of the Treasury Select Committee Mel Stride said the move would "calm the markets" and "reduce the upward pressure on interest rates".

The gains appear to be sticking at the time of writing on Tuesday with GBP/EUR at 1.1540 and GBP/USD at 1.1408.

The developments come amidst a broader recovery in the Pound as markets rebuild confidence in UK assets following a tumultuous period.

The Pound had fallen sharply after Kwarteng announced a series of tax cuts on September 26 in a bid to boost UK economic growth. Much of the cuts were expected, but some, such as the abolishment of the 45p income tax threshold, proved a surprise.

The Pound and UK gilts were sold as investors questioned the UK's fiscal credibility.

But a recovery from record lows dominated FX price action last week and Sterling jumped notably again on Monday after the Chancellor said the government was u-turning on the 45p decision.

"Sterling enjoyed another positive day, overtaking all the falls suffered on the 23rd and 26th September. Markets can be a fickle beast, but following action from the Bank of England last week, and the U-turn by the government on abolishing the 45% tax rate, confidence is seemingly creeping back into sterling markets, with gilt prices and sterling climbing back higher," says Thanim Islam, Dealer Manager at Equals Money.

The government is therefore seen to be taking steps to rectify its poor debut, and thus far it appears to be working.

"Having the announcement sooner rather than later is the right thing to do, as the longer the markets wait for proof that the government’s fiscal agenda is sound, the higher the risk of turbulence," says Nigel Green, CEO of deVere Group.

Above: GBP/USD at 45 minute intervals. Set your free FX rate alert here.

The medium-term fiscal plan will set out a five-year plan to put debt on a downward path, with expectations growing that the government will announce a squeeze on public spending to balance the books.

The next battle appears to be plans by Prime Minister Liz Truss to raise benefit payments in line with pay, and not inflation as is currently the case.

Given inflation is currently outstripping pay growth, this would represent a saving.

This battle will offer further political intrigue, but ultimately it is not relevant to markets as the expected cost savings are relatively small.

When policy changes are telegraphed and digested by markets the prospect of a kick-back, like that seen in response to the 'mini budget', is minimised.

Having been chastened, it is therefore likely Kwarteng's next outing later this month will offer less market volatility.

Elswhere, the UK's Debt Management Office (DMO) said on Tuesday the bond market is undergoing "a major repricing", but should comfortably absorb the extra £62BN of debt announced after finance minister Kwasi Kwarteng's Sept. 23 mini-budget.

"Gilts and other sovereign bond markets are all having to undergo some major repricing," said Robert Stheeman, head of the DMO.

"Gilts and other sovereign bond markets are all having to undergo some major repricing," Stheeman said.

The DMO increased its 2022/23 financing target by £72BN to £234BN after Kwarteng's mini-budget, £62B of which would be funded by the issuance of new gilts.

"I am confident that it can be digested reasonably smoothly," Stheeman said

The findings underscore the view we are a long way away from a 'Sterling crisis'