The pound rose against the dollar after Boris Johnson announced he is to be replaced as prime minister.
Sterling gained more than 0.4 per cent to $1.2 as traders priced in the prospect of an end to months of chaos under Mr Johnson’s leadership. He will remain in place while the Conservative Party selects a new leader.
As markets reacted to the news, sterling regained some of the ground it lost this week but remains more than 10 per cent down against the US currency.
The pound hit a two-year low against the dollar on Tuesday amid growing fears for the future of Britain’s economy.
The dollar has strengthened in response to a series of large interest rate increases by the US Federal Reserve.
A weak pound is serving to push up prices for goods that the UK imports, such as energy, food and manufactured products.
Consumer price inflation hit 9.1 per cent in May and is expected to surge to 11 per cent later this year, meaning households face big falls in living standards as wages fail to keep up with the rising cost of essential goods.
While new leadership of the country promises to bring some measure of political stability, the new prime minister will still face a long list of economic problems.
Consumer confidence has hit its lowest level on record according to a long-running survey by Growth from Knowledge (GfK), while car sales fell to their lowest level for any June since 1996. The construction industry is also slowing down, new industry figures show.
The Bank of England said on Tuesday that the prospects for the UK economy had “deteriorated materially” since Russia invaded Ukraine.