Broader risk on sentiment supports the pound

Daily Currency Update

Yesterday saw the official announcement of the new Prime Minister of the UK, Rishi Sunak. His speech in front of his new home, 10 Downing Street, was both realistic and pragmatic, and warned that the UK economy is going through a very difficult time, and tough decisions would have to be made. This pragmatism has been taken by the market as overall positive, and is seen as a sign that the new government will now implement more sensible and thought out fiscal policy measures, that though maybe painful for UK households in the short term, will hopefully allow the economy to rebound and sustainably come out of this difficult period.

All eyes are now on the next budget, expected to have been laid out by the new government on Monday, the 31st of October. However, with the tight schedule and timelines, there is a chance this could be delayed by a few days. The expectation is that Sunak and Hunt will want to have laid their fiscal plans out ahead of the Bank of England's next monetary policy announcement on Thursday the 3rd of November.

We also saw a drop in UK bond yields to levels not seen since Truss and Kwarteng's disastrous budget, signalling further optimism for Sunak's new regime while reducing borrowing costs for the UK government. The pound has now risen sharply, testing levels in and around 1.15 and potentially above. However, there is ongoing concern that Sunak's fiscal plans to now tighten a grip on public spending and increase taxes sharply could squeeze the average UK household a little too hard, as warned yesterday by the head of the CBI.