Outlook for pound shaky after bounce-back from historic low

(Alliance News) - Identifying the culprit behind sterling's resurgence towards the end of the week has analysts divided, with the resilience of the recovery being called into question.

Having fallen to an all-time low against the dollar of USD1.01 on Monday, it recovered to USD1.11 by Friday afternoon.

The historic plunge was prompted by a poorly-received "mini budget" from the UK's new chancellor, Kwasi Kwarteng, last Friday. After the unveiling of a series of unfunded tax cuts and bold spending plan, the pound was sent crashing, dragging market sentiment down with it.

Shortly before the big reveal, the currency had been trading at around USD1.1194.

"Markets have been coming round to the view that the unfunded tax cuts were less significant than first seen, with the pound recovering strongly in the last 48 hours," theorised Victoria Barlett of Hargreaves Lansdown.

However, Oanda's Craig Erlam disagreed, commenting: "This is not a sign of investors coming around the new chancellor's unfunded tax-cutting, but rather a reflection of the work done since to calm the market reaction."

Yields on gilts had widened considerably after the budget, prompting the Bank of England to carry out temporary purchases of long-dated gilts.

The central bank said the purpose of the purchasing was to reinstate "orderly market conditions", after UK government bonds were hit by "repricing".

It will carry out the purchases on "whatever scale is necessary to effect this outcome."

The BofE is also charged with getting a grip on surging inflation, with investors now expecting a 125 to 150 basis point hike at its next meeting.

"The BoE is pressing the brake and accelerator at the time, which is going to break something. And that something could be the pound," warned Fawad Razaqzada, market analyst at City Index and FOREX.com

Societe Generale's Kit Juckes said that it is an "unrealistic" jump in rate pricing that is propping up the pound, which could well come crashing down.

"If rates peak well below what is priced into the market, does that condemn sterling to further weakness, and maybe a test of parity against the dollar this winter? I'm trying to think of reasons why that shouldn't be the case, and not coming up with many," Juckes warned.

Whether the rebound in the pound is sustainable remains to be seen, according to Swissquote Bank's Ipek Ozkardeskaya.

"At the end of this process, either Andrew Bailey – who has been quite unpopular so far – will be a national hero, by keeping the UK sovereigns above water, gaining control over inflation and stabilizing sterling, or it will be a disaster for the UK," he concluded.

By Elizabeth Winter; [email protected]

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