The pound and the British debt 'celebrate' the resignation of Liz Truss

Sterling rose on Thursday after Liz Truss announced her resignation as UK prime minister, brought down by an economic program that sent shockwaves through markets and divided her Conservative Party just six weeks after her appointment.

Thomas Osborne
Thomas Osborne
20 October 2022 Thursday 07:43
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The pound and the British debt 'celebrate' the resignation of Liz Truss

Sterling rose on Thursday after Liz Truss announced her resignation as UK prime minister, brought down by an economic program that sent shockwaves through markets and divided her Conservative Party just six weeks after her appointment. Sterling, which was higher before the news broke, immediately gained 0.35% to $1.1262. It was also higher against the euro and was around 87.08 pence. UK government bond yields were broadly lower and their prices higher, while London equities rose briefly.

The election of the person who will replace Truss in the position will take place during the next week. "The short timeframes of the leadership election are designed to minimize the impact on the pound, but you don't want to be long (the pound) until we know who takes the helm," said Kenneth Broux, currency strategist at Société Générale.

Britain's mid-cap stock index briefly soared 1% when Truss made the announcement, advancing 0.4% at time of writing, while the large stock index moved into the red. The yield on the 10-year UK government bond was slightly lower on the day to 3.86%.

Truss's resignation came a day after a second minister resigned from his government and after disputes and rebellion by his parliamentarians took place.

After just six weeks in office, Truss's leadership has ushered in declines in the debt market and a 180-degree turn in almost his entire fiscal policy program. On Wednesday she lost her home secretary, less than a week after firing her finance minister. "Whoever comes in will probably be seen as a more credible leader than Liz Truss. On the sidelines, the markets would probably want to see someone like Rishi Sunak," said Lee Hardman, a currency analyst at MUFG.

Analysts noted that the easing of aggressive rate hike bets following comments from the Bank of England's Ben Broadbent weighed on sterling earlier in the session. Broadbent said the Bank of England is prepared to respond to changes in UK fiscal and spending policies, but he remains to see whether interest rates rise as much as investors have been expecting.

Investors further reduced their bets on a one percentage point rate hike by the Bank of England next month following Broadbent's comments. "Broadbent signaled that the interest rate may not have to rise as much as markets are pricing in and yields on British short-term bonds and sterling were down," said Colin Asher, senior economist at Mizuho Bank.

The Bank of England is on a mission to curb rising inflation after data on Wednesday showed food prices pushed British inflation into double digits last month.

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