Pound rises in Asian trading after hitting record low against the dollar

Sterling edged higher in Asian trading on Tuesday after hitting a record low against the dollar, recovering slightly after the Bank of England and the UK Treasury sought to calm tense markets.

Sterling was up 0.9 percent to $1.0776 in morning trade, just a day after an early morning plunge, sending the currency down almost 5 percent to a record low of $1.035 after British Chancellor Kwasi Kwarteng vowed pursuing further tax cuts.

The gains during the Asian morning came after Kwarteng tried to calm markets with a coordinated statement with the BoE pledging to accelerate the development of a strategy to bring Britain’s debt under control.

The UK central bank also said it “wouldn’t hesitate to change interest rates” to curb inflation, but stopped short of an emergency rate hike to support the currency.

Tuesday’s surge left the pound still down 20.4 percent against the dollar in 2022, making it a contest for the worst-performing G10 currencies this year and neck and neck with the Japanese yen, which is also down more than a fifth from the same interval.

Analysts said global investors were focused on the dent in Britain’s credibility caused by the government’s new fiscal policy announced on Friday, which would combine £45 billion in tax cuts with a huge wave of new borrowing.

“There is still no clear evidence that the root cause of the problem — the government’s fiscal strategy — is being reversed or reconsidered,” said Allan Monks, economist at JPMorgan.

Monks added that unless Kwarteng comes up with a more concrete plan to stabilize the situation, “the BoE will be forced to validate market interest rate expectations or otherwise risk delivering a dovish disappointment that ultimately raises longer-term inflation expectations.”

UK government bond prices also ended lower on Monday, taking 10-year yields to over 4.2 percent, compared with around 3.5 percent before the tax cuts were announced. Two-year gilt yields, which are more sensitive to interest rate expectations, ended the session at nearly 4.4 percent.

Although traders backed off bets that the BoE would announce a surprise rate hike, markets priced in a 1.5 percentage point hike by the Bank of England to 3.75 percent in November.

UK high street banks have also started withdrawing mortgage loans in response to rising gilt yields, with mortgage rates expected to rise significantly on the back of widespread repricing.