Pound sterling rallies as markets react to Liz Truss's resignation

Sterling could remain volatile, analysts warn, as currency finishes 0.45 per cent higher against the dollar on Thursday

Sterling shot up to $1.13 as markets anticipated that Britain's prime minister would step down. PA
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Financial markets reacted positively to the announcement that Britain's Prime Minister Liz Truss was stepping down after only six weeks in the job, as the pound rallied on Thursday.

Before her resignation speech, sterling shot up to $1.13 as markets anticipated that Ms Truss would step down, before shedding gains slightly to stand 0.45 per cent higher at $1.127 when markets closed.

Yields on UK government bonds ― gilts ― have also eased slightly in response to the prime minister’s decision.

UK 30-year gilt yields, which fall as bond prices improve, fell back by 0.44 per cent to 3.86 per cent on Thursday.

By the end of the day, yields had edged back up slightly to 3.96 per cent.

Neil Wilson at markets.com said the pound’s “knee-jerk verdict was damning”, signalling that Ms Truss's move had been welcomed across the City.

He cautioned that sterling would remain volatile as traders digested what this meant for the UK government.

“But the initial reaction seemed very appropriate as the market has acted as judge, jury and executioner for the Truss regime," Mr Wilson said.

British Prime Minister Liz Truss resigns - in pictures

It comes after the pound has suffered a tumultuous two months sparked by the market turmoil seen in the wake of former chancellor Kwasi Kwarteng’s mini-budget – at one stage sterling slumped to its lowest ever level against the US dollar.

A sell-off in gilts sparked by the market chaos also threatened to trigger a mini financial crisis in the UK at one stage, leaving some pension funds at risk of collapse and forcing the Bank of England to step in with emergency action late last month.

The FTSE 100 Index stood 0.1 per cent lower at 6,919.6 as the pound’s rally weighed on blue chips, in particular major UK exporters.

But by the end of the day it had jumped back into the green and was up 0.27 per cent at 6,943.9.

Liz Truss through the years - in pictures

Victoria Scholar, head of investment at Interactive Investor, a UK-based flat fee investment platform, said investors are welcoming “the potential for a more economically savvy, market-friendly leader”.

“There is still plenty of caution towards the UK as an investment destination given the ongoing political uncertainty, the growing risk of recession and Britain’s persistent inflation problem with price levels hovering at 40-year highs," she added.

“Focus among investors now shifts to the leadership election, the chancellor’s medium-term fiscal plan on 31st October and the Bank of England’s rate decision in early November.”

Updated: October 21, 2022, 5:00 AM