The pound has bounced back to levels seen before the Government’s controversial mini-budget as the Chancellor performed a U-turn on the decision to axe the 45p tax rate.
Sterling surged to 1.13 US dollars at one stage overnight, recovering ground lost in the market turmoil sparked by Kwasi Kwarteng’s infamous mini-budget, though it pared back some of the gains in early morning trading to stand at 1.12.
The chaos in financial markets following Mr Kwarteng’s fiscal event saw the pound fall to an all-time low of 1.03 US dollars amid fears over the Government’s unfunded tax cuts and wider economic policies.
The decision to renege on the unpopular move to scrap the highest band of income tax also helped ease pressure on UK government bonds, known as gilts, with yields on the bonds seeing further steep falls on Monday.
The Bank of England was forced to step in last week with an emergency gilt-buying programme to halt a sell-off in the government bond market that had left some pension funds on the brink of collapse as gilt yields soared higher.
But the FTSE 100 Index remained under pressure, falling nearly 1% soon after opening on Monday.
Chris Turner, global head of markets at ING, said the pound looks to have been saved for now from hitting parity against the dollar.
He said: “This move is rather symbolic, being less about the amount of money it will save (low billions) and more about the poor signal it had delivered of ideological (unfunded) tax cuts.
“This does alleviate the risk of cable (pound versus US dollar) trading to parity in that it shows Downing Street will show greater respect to financial markets when considering policy options.”
It comes after ratings agency S&P on Friday became the latest to deliver a blow to the Government, downgrading its outlook on the UK to negative from stable in an unscheduled move.
George Lagarias, chief economist at Mazars, said: “The Chancellor’s forced U-turn should take some pressure off the pound, for the time being.
“Still, the UK has lost some credibility with international markets over the past few years.
“Despite the pound’s currency reserve status, British risk assets have a long and difficult way before they return as a staple in the portfolios of international long-term investors.”
The pound is still down by more than 17% since the start of the year, adding to the cost-of-living crisis by making it more expensive to import goods, commodities and services.