Sterling recovers ground as investors welcome Sunak victory in PM race
LONDON Oct 24 (Reuters) - The pound rallied off session lows on Monday and gilts bounced, as former finance minister Rishi Sunak won the race to become the next prime minister, giving investors a greater sense of confidence in the robustness of Britain's finances.
Sterling whipsawed between a high of $1.1402 and a low of $1.1274, in a volatile session that kicked off with Sunak's rival Boris Johnson withdrawing from the leadership contest late on Sunday.
Sunak, one of the wealthiest politicians in Westminster, will be asked to form a government by King Charles III, replacing Liz Truss, who lasted six weeks in the job after her economic programme sparked panic in financial markets.
"It seems that the announcement was pretty well priced in by this point - especially after sterling’s notable gains at the Asia open last night," said Michael Brown, head of Market intelligence at Caxton.
"Having said that, Sunak taking over as PM should restore a significant amount of credibility around UK policy, which is likely to limit downside for sterling assets in the near term."
Gilt yields fell sharply, thanks to a sense of relief among investors over the outlook for Britain's finances. Benchmark 10-year yields fell 28 basis points to 3.774%, nearing their lowest so far this month.
BlackRock, the world's largest asset manager, said in a weekly note Britain's fiscal credibility had improved, but the damage inflicted by Truss' "mini budget" in late September had not been completely reversed.
Against the dollar, the pound was steady on the day at $1.1303 and eased 0.2% against the euro to 87.40 pence.
Even with a greater sense of confidence in markets, the medium term outlook for the pound looks troubled.
"We maybe have a bit less chaos with Boris Johnson not running, but it's not like Rishi Sunak has a strong programme presenting greater horizons ahead for the UK economy when the backdrop is still the backdrop," said John Hardy head of FX strategy at Saxo Bank.
The UK has the highest inflation within the G7 and is forecast to have the slowest growth among major economies, bar Russia, next year as it grapples with a cost-of-living crisis, as well as the impact on its trade and finaces from a weak currency and Brexit.
Hardy said he didn't see a return of the "chaos" that sent the pound to a record low of $1.0327 on Sept. 26 and caused a spike in euro/ sterling as the Bank of England and the government would send the right signals. "But I just don't see a strong steady improvement," he added.
The pound tumbled and gilt yields soared as a fiscal plan containing a raft of unfunded tax cuts unveiled by then finance minister Kwasi Kwarteng spooked markets. The so-called 'mini budget' also ultimately led to the removal of Truss as Prime Minister.
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