Sterling is set for its best week since 2020 as budget fears ease

Sterling headed for its best week since late 2020 on Friday amid efforts by UK policymakers to reverse some of the market damage caused by last week’s tax-cutting and debt-inflating fiscal plan.

The British currency surged to a fresh weekly high of $1.1222 at the start of the Asian session, coming very close to erasing all precipitous losses after the new government’s so-called mini-budget last Friday.

However, the currency pair — also known as Cable — slipped later in the session, down 0.17 percent from Thursday’s $1.1100.

With that, the pound was still on course for a 2.26 percent gain for the week, despite hitting a record low of $1.0327 on Monday.

“The recovery in the cable business is very striking,” said Sean Callow, strategist at Westpac in Sydney.

“It makes sense that UK yields will be high for some time, discouraging short positions. But with the UK already running very large current account deficits, we doubt there is much more upside potential for sterling.”

Overnight, the British pound rose 2.13 percent as the Bank of England (BoE) staged a second day of asset purchases to stabilize markets, sending gilt yields higher.

Meanwhile, British Prime Minister Liz Truss and Finance Minister Kwasi Kwarteng are due to meet the head of the country’s independent budget watchdog, the Office for Budget Responsibility (OBR), on Friday to discuss the budget forecasting process.

Truss on Thursday promised to stick to the controversial plans in her first comments since the market turmoil erupted.

The involvement of the OBR “alleviates fears in the markets over the hitherto uncalculated tax package and helps support the GBP,” said Tapas Strickland, head of Markets at National Australia Bank.

“A hot German CPI print also serves as a reminder of the inflation situation in Europe – and globally – and that central banks must remain hawkish. With that in mind, Wednesday’s BoE decision to buy bonds should not be read as a linchpin,” Strickland added.

Thursday’s data showed German inflation at its highest level in more than a quarter-century, buoyed by high energy prices, with analysts warning that the energy crisis is yet to have its full impact.

The read suggests Friday’s expected figure for the broader 19-nation euro zone is also likely to beat economists’ forecasts.

Markets are fully priced in for another 75 basis point hike from the ECB next month with 1 in 3 chances of a full percentage point hike.

For the BoE, traders are forecasting a 125 basis point tightening in early November with little chance of a 150 basis point hike. Sterling is set for its best week since 2020 as budget fears ease

Fry Electronics Team

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