Pound rallies as traders eye shift in UK fiscal stance under new finance minister

LONDON - The pound rose in early Asia trading on Monday as investor confidence was bolstered by expectations that more of Prime Minister Liz Truss' package of unfunded tax cuts may be reversed.

Sterling gained 0.77 per cent to US$1.1258.

Against the Singapore dollar, the pound surged 0.83 per cent to $1.6070 as at 4.10pm local time. The pound is still down about 11.8 per cent against the Singapore currency this year.

Britain's newly appointed finance minister, Mr Jeremy Hunt, said in a BBC interview on Sunday that nothing is "off the table" when it came to potentially abandoning more of the Premier's planned measures.

"It does indicate that they are moving back to some degree of fiscal probity and employing a slightly more prudent fiscal outlook," said Mr Peter Kinsella, global head of FX strategy at Union Bancaire Privee in London.

The government's steps should be enough to "stabilise" the currency before the announcement of the medium-term fiscal plan at the end of the month, he added. 

The pound has whipsawed as rumours about a potential swathe of U-turns from the Treasury took hold. It surged as much as 2.5 per cent against the dollar on Thursday as reports of widespread changes trickled in, before falling 1.4 per cent on Friday after a lacklustre press conference from Ms Truss that contained little new information.

Still, the pound remains vulnerable. The end of the Bank of England's (BOE) emergency bond-buying programme on Friday could risk further ructions in the gilt market, with uncertainty persisting over the extent to which liability-driven investment funds have recovered from the impact of the spike in bond yields.

While volatile, the currency has nevertheless recovered near to levels seen before the government unveiled its fiscal plans on Sept 23, which analysts attribute in part to the BOE's interventions in the bond market that staved off the risk of broader financial instability.

"When the dust settles, we expect that the BOE will hike less than the market is pricing, and sterling will need to act as the main adjustment mechanism," Goldman Sachs Group strategists wrote in a note. The firm sees the pound falling to US$1.05 in three months. BLOOMBERG

• With additional information from The Straits Times