The pound rose in early trading on Tuesday after the Bank of England stepped in to reassure markets, saying it would not hesitate to change interest rates to rein in inflation.
Sterling climbed to $1.08 after markets opened in the UK, following its plunge to a record low of less than $1.04 against the greenback on Monday.
The FTSE also gained ground after opening as calm returned following the turmoil.
The markets have been rattled since Friday, when chancellor Kwasi Kwarteng announced the government’s plan for the economy, which included massive tax cuts funded by heavy borrowing.
The pound fell sharply in response, and plummeted still further to historic lows on Monday after Mr Kwarteng hinted at the weekend there could be more tax cuts to come.
Speculation swirled the Bank of England may impose an emergency interest rate rise on Monday following the dramatic falls in the pound.
But governor Mr Bailey merely released a statement in the end.
He said the Bank would change interest rates “by as much as needed” to get inflation back to its 2 per cent target.
The pound may have since stabilised, but traders were still betting on Tuesday there was a 43 per cent chance the pound could fall to just $1 before the end of the year, and analysts at Morgan Stanley and Nomura said it could touch or cross that level.
“I think it's going to get worse unfortunately,” Jordan Rochester, a strategist at Nomura, told Bloomberg.
“I don't want it to be worse. This is the country I earn my money in.”
Some banks and building societies have withdrawn mortgages in the UK to new customers due to the market turbulence and rising interest rates, which could treble next year.
Three lenders — Virgin Money, Halifax and Skipton Building Society — have so far pulled products, with others expected to follow suit.
Virgin Money said: “Given market conditions we have temporarily withdrawn Virgin Money mortgage products for new business customers.
“Existing applications already submitted will be processed as normal and we'll continue to offer our product transfer range for existing customers.
“We expect to launch a new product range later this week.”
Halifax said it was withdrawing all mortgages that come with a fee as a result of “significant changes in mortgage market pricing”.
The Skipton Building Society said it had also withdrawn its offers for new customers, in order to “reprice”.
Consumer Prices Index inflation is currently hovering at around 10 per cent, and is predicted to rise even higher, peaking later this year.
The Bank of England is expected to raise the base rate by another two percentage points by the end of the year in response, but experts say the rate could almost treble in 2023 to 6 per cent.
The chancellor has pledged to bring forward an announcement of a “medium-term fiscal plan” to start bringing down debt levels.
The Treasury said it would now be published on November 23, having previously been scheduled for the new year, and would include further details on the government's fiscal rules, including ensuring that debt falls as a share of GDP in the medium term.
At the same time, the Office for Budget Responsibility will publish its updated forecasts for the current calendar amid widespread criticism that there was no update when Mr Kwarteng set out his “plan for growth” last week.
