Pound slides amid UK political drama, stocks soar

The pound fell Friday as under-fire British Prime Minister Liz Truss sacked her finance minister and made a dramatic policy U-turn, while equities rallied for a second day despite surging US inflation.

The yen held around three-decade dollar lows as rampant US consumer prices cemented expectations of more hefty Federal Reserve rate hikes.

Truss sacked Kwasi Kwarteng as finance minister as pressure mounted on her government following last month’s big spending, tax-slashing budget, which spooked markets.

The September 23 budget sent the pound tumbling to a record dollar low near parity with the greenback and bond yields surged, before stabilising thanks to interventions by the Bank of England.

Sterling sank 1.2 per cent to $1.1188 after Prime Minister Liz Truss dismissed Kwarteng. It reduced those losses as Truss appointed Jeremy Hunt as her new finance minister.

“The soap opera that is UK politics continues to dominate FX markets Friday,” said Stephen Innes, managing partner at SPI Asset Management.

Truss later announced a dramatic policy U-turn, stating the “need to act now to reassure the markets”, abandoning plans to eliminate an increase in corporation tax.

UK 10-year government bond yields fell further following the announcement, despite the Bank of England having insisted the costly market interventions would end Friday.

London’s FTSE 100 was 1.6 per cent higher in afternoon trading.

Stock markets continued to push higher Friday after rising on Thursday despite data showing strong inflationary pressures in the United States.

“Markets staged an astonishing rebound despite a hotter-than-expected inflation report in the United States,” said Interactive Investor analyst Richard Hunter on the broad-based gains.

“The reasons... were not immediately clear, although traders pointed to a technical rebound as investors unwound defensive positions which had been in place ahead of the inflation report.”