The pound has returned to levels before the government’s controversial mini-budget, as the Chancellor reversed the decision to abolish the 45p tax rate.
The pound rose to $1.13 overnight at one point, regaining ground lost in the market turmoil caused by Kwasi Kwarteng’s infamous mini-budget, although it lost some of the reduced early morning trading profits to 1.12.
The turmoil in financial markets following Mr. Kwarteng’s fiscal event has seen the pound drop to an all-time low of $1.03, amid fears of the government’s unfunded tax cuts and broader economic policies.
The decision to forgo the unpopular move to abolish the top income tax bracket also helped ease pressure on UK government bonds, known as gilts, with bond yields falling further sharply on Monday.
The Bank of England was forced to intervene last week with a contingency government bond-buying program to halt a sell-off in the government bond market, which has left some pension funds on the brink of collapse as yields rose. government bonds skyrocketed.
But the FTSE 100 index continued to be under pressure, falling nearly 1% shortly after it opened on Monday.
Chris Turner, Global Head of Markets at ING, said the pound appears to have been bailed out of parity against the dollar for now.
He said: “This move is quite symbolic, it is less about the amount of money it will save (low billions) and more about the bad signal it sent from ideological (unfunded) tax cuts.
“This reduces the risk of cable trading (pound versus US dollar) to parity, as it shows that Downing Street will show more respect for the financial markets when considering policy options.”
It comes after rating agency S&P was the latest to hit the government on Friday, lowering the UK outlook from stable to negative, in an unplanned 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.
“Yet the UK has lost some credibility in international markets in recent years.
“Despite the pound’s foreign exchange reserve status, UK risk assets have a long and difficult road ahead of them returning as a staple in the portfolios of long-term international investors.”
The pound is still down more than 17% since the start of the year, contributing to the cost of living crisis as it becomes more expensive to import goods, commodities and services.