Sterling climbs as dollar slips in wake of Bank of England intervention
Reuters
Published Sep 29, 2022 09:31
Updated Sep 29, 2022 16:46
By Harry Robertson
LONDON (Reuters) -The pound reversed losses and climbed more than 1% on Thursday as the dollar slipped and investors analysed the Bank of England’s dramatic intervention in the bond market.
Sterling had dropped in morning trading in London but later rallied to stand 1.3% higher on the day at $1.1026 in the afternoon session. It rose against most major currencies, with the euro last down 1.01% at 88.48 pence. The pound crashed to a record low against the dollar of $1.0327 on Monday after new finance minister Kwasi Kwarteng unveiled plans to cut taxes, particularly for the rich, and raise borrowing.
The so-called mini budget sparked chaos in financial markets, forcing the Bank of England to start buying bonds again on Wednesday.
However, British Prime Minister Liz Truss refused to back down on Thursday, saying on BBC radio that her government's plans were the right ones for the country.
The pound's rise on Thursday took its three-day rally to more than 3%, although sterling is still down by more than 18% this year.
Analysts struggled to identify an exact catalyst but pointed to the BoE's intervention, a fall in the dollar, and the rebalancing of portfolios towards the end of the quarter. Many cautioned that trading was febrile and the outlook for the pound remained gloomy.
"The BoE's intervention has shown that it is willing to act when being pressured by the markets. This helps to stabilize the pound," Esther Reichelt, foreign exchange strategist at Commerzbank (ETR:CBKG), said.
"However, the whole political situation remains highly volatile and sentiment can change quickly."
Kwarteng's mini budget triggered a huge sell-off in UK government bonds as investors reacted to the extra borrowing the plans implied. That piled pressure on pension funds, which are big holders of long-dated gilts, and caused the BoE to step in.
The BoE said it would buy around 65 billion pounds ($71 billion) of long-dated government bonds to rectify "dysfunction" in the market.
Adam Cole, head of foreign exchange strategy at RBC Capital Markets, said a key driver in the currency markets on Thursday was the dollar, which picked up in Asian trading but later fell back sharply. {{2126|The dodollar index was last down 0.57% to 112.39. It had earlier risen to a session high of 113.79. Analysts said the dollar's pull-back came after the People's Bank of China told state banks to be prepared to sell the U.S. currency in favour of the yuan, a step first reported by Reuters.
POUND PESSIMISM
Despite the rebound, most investors remain pessimistic about sterling, given the strength of the dollar and the storm clouds over the UK economy.
"I don't think (the BoE's intervention) is going to be a long-term boost for sterling, although it might prevent an extreme downturn," Jonas Goltermann, senior markets economist at consultancy Capital Economics, said.
Get The App
Goltermann said further falls in sterling were probable. He said the BoE was unlikely to hike interest rates as high as the 6% traders expect by spring next year.One analyst said they were also watching for signs of more selling of UK assets by pensions funds. Pensions funds have been heavily selling gilts in recent days after the market falls triggered calls for collateral payments on their gilt derivatives positions, analysts and pensions advisers said. Cole said RBC Capital Markets had long expected the pound to fall to $1.04, but would likely cut its price target even further in the coming days.
($1 = 0.9214 pounds)
Written By: Reuters
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.