Fightback pushes sterling above $1.11: Pound rebounds from record low

The pound fought back on the global currency markets after it was pummelled to an all-time low against the US dollar.

On another day of turmoil on financial markets worldwide, sterling rose back above $1.11, putting it in touching distance of where it was before Chancellor Kwasi Kwarteng delivered last week’s controversial mini-Budget.

The pound has gained around 7 per cent against the dollar since crashing to a record low below $1.04 on Monday. It was up against the euro, rising above €1.13 for the first time since last week.

Like other currencies around the world, sterling has been crushed by the dollar this year as the US Federal Reserve acts to tame sky-high inflation through higher interest rates. The dollar has also benefited from its status as a safe asset in times of economic strife.

But the pound took an aggressive lurch downwards in the wake of the mini-Budget as investors fretted over £45billion of unfunded tax cuts and a cap on energy bills that could cost £100billion.

The Bank of England also faced criticism for acting too slowly and meekly to combat inflation, which this summer topped 10 per cent for the first time in four decades. 

The currency chaos spread to the bond markets, forcing the Bank to intervene on Wednesday with a pledge to buy long-dated UK government debt to restore order.

In a speech to business leaders in London last night, Huw Pill, the Bank of England’s chief economist, said that there would be a ‘significant’ response to recent events when the rate-setting Monetary Policy Committee next meets in early November.

Many observers expect the Bank to raise rates by as much as one percentage point – far bigger than the 0.25 and 0.5 percentage point moves so far this year. 

The intervention in bond markets and prospect of further rate hikes lifted the pound. 

Brian Daingerfield, head of G10 FX strategy at NatWest Markets in Connecticut, said: ‘The Bank of England took a pretty decisive step to stabilise markets. And that is being taken positively by the currency market.’

But with inflation rampant and global interest rates rising, government borrowing costs in the form of bond yields rose again in the UK, US and Europe.

Neil Wilson, analyst at Market, said: ‘I have rarely seen sentiment so bad. “We’re doomed” seems to be the prevailing mood. 

‘We’ve not seen bond markets in such a state of flux for many years. Stocks are hovering around two-year lows and the dollar moves serenely on, crushing everything in its path.’