Best week for pound since 2020 as market recovers from mini-Budget crash

The pound had its best week since July 2020 after a sharp recovery from a crash in the wake of the mini-Budget that sent it to record lows.

Sterling fell just below $1.04 against the dollar early on Monday morning, then rallied to end the week at more than $1.11.

It effectively wipes out all of the moves in the pound which have taken place since Kwasi Kwarteng stood up to speak in Parliament on Friday 23 September.

There has also been a crunch in long-date gilt markets requiring a Bank of England rescue of £65bn, intense pressure to raise interest rates, and a squeeze in the mortgage market which analysts warned threatens to derail purchases and send property prices falling.

Overall the pound is still down from $1.35 at the start of the year, but the recovery of the past week means it is now more in line with other world currencies which have also plunged relative to the dollar.

This has been caused in significant part by the Federal Reserve raising interest rates more rapidly in the US than other central banks have managed around the world.

As a result this drives investors to seek higher returns on offer in the States, to the detriment of other nations’ currencies.

Roberto Mialich, FX strategist at UniCredit, said the recovery means the pound is now unlikely to fall below $1, the doomsday scenario which traders had feared would happen when in the grip of panic early in the week.

Predicting only a modest drop back to around $1.07 by the end of the year, he said: “We are sceptical about depicting a scenario in which the pound hits new record lows towards, or even below, parity, especially if the Bank of England’s response and the multi-year fiscal plan, which is also to be presented in November, do not disappoint."

Krishna Guha, an analyst at Evercore ISI, said the Prime Minister’s willingness to meet the Office for Budget Responsibility to discuss the public finances has given markets confidence that fiscal responsibility is not being ignored.

He said: “Ms Truss’s meeting today with the independent UK fiscal watchdog OBR – which was sidelined ahead of the Government’s disastrous fiscal announcement last Friday – publicly signals a belated recognition of the need to restore confidence in the UK’s fiscal framework. As such it is lending some support to risk assets and to sterling,” he said.