Monthly Wrap: GBP – Pound rocked by UK fiscal and political uncertainty

Key takeaways:

• Pound infused with volatility by UK political drama.

• BoE’s bond market intervention helps avert a Sterling crisis.

• GBP Monthly lows: €1.10, $1.05, AU$1.64, NZ$1.87, C$1.45

• GBP Monthly highs: €1.16, $1.16, AU$1.81, NZ$1.02, C$1.56

It’s been an eventful month for the pound, with the currency trading with a high degree of volatility amid notable UK fiscal and political uncertainty.

The fallout of Chancellor Kwasi Kwarteng’s mini-budget saw Sterling open the month on extremely poor footing, with the GBP/USD exchange rate trading just above the record low struck in late September.

A timely bond market intervention from the Bank of England (BoE) helped to avert a full-blown Sterling crisis, allowing the pound to rebound as we entered October.

Extending this recovery was a U-turn from Kwarteng regarding his plans to cut taxes for the UK’s highest earners.

After facing another setback amid warnings the UK’s credit rating could be downgraded, reports of another U-turn from the government helped place the pound back on a positive trajectory.

This gave way to fresh volatility following the sudden sacking of Kwarteng and his replacement by Jeremy Hunt, with questions over the future of Liz Truss’s premiership overshadowing the government’s reversal on plans to cut corporation tax.

Hunt’s scrapping of most of his predecessor’s budget then brought more relief to the pound, before Truss’s resignation as PM infused fresh volatility into GBP exchange rates.

Sterling then pressed higher in the last week of October as Rishi Sunak was crowned as the UK’s third Prime Minister in as many months. Sunak is viewed as a ‘safe pair of hands’ by GBP investors, who hope his fiscal prudence will help restore credibility to the UK government.

The immediate focus for GBP investors is likely to be on the BoE’s latest interest rate decision. With Sunak’s appointment helping to calm markets, the BoE may be inclined to raise rates more modestly than it may have done at the start of October.

Also in the spotlight will be the publication of Jeremy Hunt’s Autumn statement on 17 November. A positive response to the government’s spending and tax plans could propel Sterling higher.