Sterling soared to six-week highs on Wednesday, as Britain's new Prime Minister Rishi Sunak holds his first cabinet meeting amid reports he could delay the announcement of a plan to repair the country's public finances.
Sunak took power on Tuesday with a promise to fix the mistakes of his predecessor and stabilise the economy, warning Britain faced a "profound economic crisis".
Foreign minister James Cleverly said on Wednesday the government's fiscal plan, scheduled for Oct. 31 and hotly anticipated by markets, could be delayed, suggesting a little more time might be needed to spell out the details. The pound was last up 1.16% against the dollar at $1.1601, and was 0.41% higher versus the euro at 86.500 pence per euro.
"Things are certainly starting to look a lot more constructive for the pound," said Michael Brown, head of market intelligence at Caxton.
"PM Sunak coming into office appears to have restored fiscal credibility with the market, removing a large chunk of the risk premium that was previously associated with UK assets," said Brown. Former prime minister Liz Truss resigned last week following major U-turns on her fiscal plan, which had sent UK gilt markets into chaos and saw the value of the pound plummet to a record low of $1.0327 against the dollar on Sept. 26.
The currency has regained almost 13% in value since then, but is still 14% down so far this year against the dollar.
According to Caxton's Brown, a broad softening in the dollar as the market anticipates a more dovish Federal Reserve next week should continue to underpin the pound for now. For Chris Turner, head of FX Strategy at ING, $1.1500 is a big level for sterling, and a sustained break above that level could see the correction extend to $1.1750.
"But such a correction would more likely be driven by a global re-assessment of risk ($ negative) than a further re-rating of UK prospects," Turner wrote in a note.
Despite the pound's recovery, Britain's economic outlook still presents a major headwind. Data last week showed inflation rising back to a 40-year high in a new blow for households grappling with a cost-of-living crisis and compounding the challenge faced by the Bank of England (BoE), which is tasked with bringing inflation back to its 2% target.
