UPDATE 1-Sterling rises as Sunak win in PM race offsets economic gloom

(Updates with details, comments; updates prices)

By Amanda Cooper

LONDON, Oct 25 (Reuters) – The pound rose on Tuesday, boosted by some relief from investors after Rishi Sunak became Britain’s next prime minister, although analysts said the gains were likely to be short-lived given the bleak economic outlook.

The 42-year-old former finance minister is now Britain’s third prime minister in less than two months. Sunak said on Tuesday he would try to undo the mess left by his predecessor, restore confidence in British politics and tackle a “deep economic crisis”, but warned the country there would be decisions difficult.

Jeremy Hunt, whom outgoing Prime Minister Liz Truss appointed finance minister to replace Kwasi Kwarteng, is widely expected to serve as chancellor under Sunak. His first task will likely be to present details of what remains of the Truss government’s budget plan on October 31.

Britain saw its borrowing costs exceed those of far more indebted countries, such as Italy or Greece, and the pound soared to record highs after Truss unveiled an economic program that rocked financial markets and cost him his job after just six weeks in office.

“One thing that will be unmasked, certainly in the next few days, is the whole list of bad fundamentals that existed before the mini-budget are still there. And what Liz Truss has really done is accentuate a torrid period for the UK assets,” said Rabobank strategist Jane Foley.

The government is already struggling with a current account deficit of 44 billion pounds ($49.80 billion), while growth is slowing and inflation is in double digits.

“Yields have come down from the highs and money market rates have come back and there is a lot of hope that Rishi Sunak will be the market-friendly candidate who can deliver something with Jeremy Hunt next week that will also be market-friendly. that’s possible given the circumstances. But we still have a looming current account deficit, which of course exposes the pound to the winds of international investors if they don’t like these UK fundamentals,” Foley said.

The pound rose 0.46% against the dollar to $1.1325 and 0.6% against the euro to 86.97 pence.

The pound hit an all-time low of $1.0327 against the dollar following the September 26 mini-budget. It has since recovered nearly 9.5% in value, but is still down 16% so far this year against the dollar and around 4% lower against the euro.

Yields on long-term gilts, which were at the center of the storm that tore through markets after the mini-budget, have almost returned to where they were before the release of the budget plan on September 23, reflecting a greater degree confidence among investors.

The pound’s volatility has crashed since the mini-budget and is on track for a 4 percentage point decline so far this month, although it is still well above its average at most long term.

Three-month volatility, a gauge of investor appetite, fell to around 12.85% from over 17% at the end of September. But that remains comfortably above the 8.8% average rate that has prevailed over the past five years, according to data from Refinitiv.

“The fall in UK gilt yields suggests one thing, and that is that we are likely to see a budget presented next week and all indications are that it will be presented by Jeremy Hunt, the current Chancellor of the Exchequer,” Michael said. Hewson, chief strategist of CMC Markets. said.

With gilt yields falling, the pound is likely to struggle for gains, “largely on the basis that the economic outlook for the UK economy remains bleak,” he said. ($1 = 0.8835 pounds)

(Reporting by Amanda Cooper; Editing by Christian Schmollinger and Maju Samuel)

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