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Pound extends fall against dollar after Liz Truss speech

British Prime Minister Liz Truss speaks on stage at Britain's Conservative Party's annual conference. The pound continued its decline against the dollar
The pound fell after Liz Truss spoke at Britain's Conservative Party's annual conference in Birmingham. Photo: Toby Melville/Reuters (Toby Melville / reuters)

The pound continue to slip against the dollar (GBPUSD=X) on Wednesday as traders weigh up the UK government’s U-turns, and a speech from prime minister Liz Truss.

Sterling had initially jumped against the US greenback in early trade, hitting its highest level in three weeks. However, it soon gave up those gains.

The pound was down 0.9% at $1.1371 at the time of writing, and down 0.24% against the euro (GBPEUR=X) at €1.1460. It also comes as the euro is edging back towards parity with the dollar.

On Thursday, the PM defended her focus on cutting taxes to generate UK growth, and told the Conservative party conference that the government needed to "step up" to face the challenges of a new era.

"I'm ready to take the hard choices, you can trust me to do what it takes. The status quo is not an option," she said.

"Truss is trying to rally her party around their budget plan and the roll back on the 45% tax rates seemed to a step in the right direction," Brad Bechtel of Jefferies said.

"The BoE stabilizing the bond market helped the GBP/USD recover all the way back to 1.1500 overnight, and we are back through 1.1400 now. This is probably the sell zone for this pair given how from out of the woods we really are here still."

He warned that the pound could fall back to $1.10 "in a blink of an eye", given the volatility.

The pound is around 10% above its record low nine days ago. The dollar suffered its biggest losses for years on Wednesday, after a dovish central bank surprise in Australia had investors wondering whether a peak is in sight for global interest rates.

Overnight the US greenback fell around 1.6% on the euro to test parity at $0.9999.

The US dollar index fell 1.3%, its largest decline since March 2020 at the start of the pandemic. It was down more than 4% since hitting a 20-year peak last week.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, said: “The more robust pound, compared its fragile state last week, will minimise slightly some of the effect of the jump in oil prices for UK consumers, given that a stronger sterling makes imports of good priced in dollars less expensive, but even at $1.14 the pound is still hovering around levels which were last broadly seen in the mid-1980s."

Meanwhile, Matthew Ryan, head of market strategy at global financial services firm Ebury, said: “One of the currencies that benefitted the most from the broad retracement in the dollar was sterling, which continues to bounce back well from its record low levels. Investors still continue to see the recent budget announcement as a net negative for the UK economy.

“That said, intervention from the Bank of England in the fixed income market, and a U-turn on the government’s controversial proposal to scrap the 45p tax bracket do at least appear to have drastically improved sentiment towards the pound.”

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He added: “Against the dollar, sterling is now trading higher than where it was before the budget announcement, which I would argue is one of the most drastic and rapid reversals in fortune for a major currency that we’ve witnessed in a number of years.”

The ongoing energy crisis in Europe, which is likely to trigger recessions across the continent, has also left the pound and the euro at very weak levels.

Standard Chartered (STAN.L) and Royal Bank of Canada (RY.TO) both expect the pound to fall almost 10% from current levels by the end of the year.

Nomura and Morgan Stanley (MS) are forecasting it will drop to parity with the dollar during the same period.

Kamal Sharma, FX strategist at Bank of America (BAC), said: "We continue to maintain a bearish view on GBP and look for GBP/USD to breach 1.10 and EUR/GBP through 0.90.

“In our view, the risks are rising for a more disorderly unravelling unless the market can be convinced that the UK has a credible plan to tackle the large structural imbalance".

Watch: How does inflation affect interest rates?

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