Pound Sterling Raises Roof amid Speculation of Budgetary Pragmatism
- Written by: James Skinner
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"The main catalyst appears to be signals that UK government might not follow through on all tax cuts announced a few weeks back" - CIBC Capital Markets.
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Pound Sterling built further on strong gains against all comparable currencies on Thursday amid media speculation suggesting that Prime Minster Liz Truss may be on the cusp of demonstrating the pragmatism that she is reportedly renowned for in relation to September's budget-like spending proposals.
Sam Coates, the deputy political editor at Sky News, reported via his Twitter account on Thursday that Prime Minister Liz Truss and Chancellor Kwasi Kwarteng may be on the cusp of scaling down September's budget-like spending plans so they better conform with those put forward during the Conservative Party leadership election.
Downing Street denying any changes to mini budget but I'm told by sources discusssions underway over which bits might yet be junked give the scale of the concern
— Sam Coates Sky (@SamCoatesSky) October 13, 2022
Looking at a return to the mandate from the leadership contest
No clarity on timing of announcement if it happens
September's budget-like announcement was followed by heavy losses for Pound Sterling against all currencies and for UK government bonds.
Ahead of Thursday's report the Pound was already up against all counterparts listed below except the Norwegian Krone (GBP/NOK) but quickly overtook the Scandinavian currency as Sterling's gains broadened and built further.
Source: Netdania Markets.
Government proposals included publicly-funded subsidies for household energy costs that have doubled twice over in the last year and a range of tax cuts.
The tax cuts were as economically contentious for many economists and analysts as they have been ideologically contentious for some politicians.
One common criticism of the tax cuts is that they could add further to inflation by making it easier for companies to raise prices in response to the increased costs of materials that have stemmed from this year's increases in commodity prices.
Another popular criticism has been that the fiscal plans were not accompanied in late September by any other plan for eventually eliminating the budget deficit, and instead appeared to gamble that tax cuts alone would boost the economy sufficiently to correct the deficit themselves.
"Gilts are bid – and massively outperforming across the curve. GBP is outperforming against the USD as well as short covering is underway," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.
"The main catalyst appears to be signals that UK government might not follow through on all tax cuts announced a few weeks back. Elsewhere, the USD is retracing a bit ahead of the release of US CPI within the hour," Rai said in a Thursday market commentary.
Above: Pound to Dollar rate shown at 15 minute intervals alongside GBP/EUR, GBP/JPY and GBP/CNH.
