Pound reverses all damage done during Liz Truss premiership

The pound has strengthened to its highest level against the US dollar in three months, reversing all the damage done to the currency since Liz Truss’s ill-fated premiership.

Sterling today climbed 0.7 per cent against the greenback, hitting $1.21.

A combination of the US Federal Reserve signalling it will slow its aggressive interest rate hike cycle and a near reversal of the whole mini-budget has pushed the pound higher.

Last night, minutes from the Fed’s latest meeting revealed policy makers are likely to lift borrowing costs 50 basis points at the next federal open market committee (FOMC) meeting on 15 December.

Chair Jerome Powell and the rest of the FOMC has squeezed financial conditions 375 basis points since March, the fastest tightening campaign since the early 1980s.

Higher rates across the pond have sent the dollar on an upward spiral against nearly all the world’s major currencies. It has strengthened over eight per cent against the euro since the beginning of the year.

Investors tend to park their cash in countries that offer higher interest rates, or returns, on safe assets such as government debt. This dynamic strengthens a currency by raising demand for it.

Pound/US dollar exchange rate

The Fed has lifted rates 85 basis points more compared to the Bank of England since the two central banks began their tightening cycles, making the US a relatively more attractive investment prospect than the UK.

There are signs inflation has peaked in America. Latest figures came in far below Wall Street’s expectations at 7.7 per cent and core inflation halved over the last month.

Slowing price growth has strengthened the case for the Fed easing off the accelerator.

Analysts said Rishi Sunak has reassured investors over Britain’s financial credibility, reducing the risk of buying sterling-denominated assets.

“Investors feel Rishi Sunak appears more resolute than his predecessor in trying to address rising borrowing costs,” Fawad Razaqzada, market analyst at City Index, told Morning Wire

Truss launched £45bn of unfunded tax cuts on 23 September, putting UK borrowing on a steep upward path. The pound slumped to its lowest level ever against the greenback in the days after the mini-budget.

She was forced into quitting as the shortest serving prime minister ever due to the markets awful reaction to her tax-cutting growth plans.

Pretty all of Truss’s measures have been ditched, with chancellor Jeremy Hunt launching £55bn of tax rises and spending cuts last week.

Gilt yields rose sharply as well as investors demanding a greater return in exchange for swallowing more government borrowing.

Yields, which move inversely to prices, were flat today.