Sterling surges as global markets bounce back

The pound rose on a wild day for markets as traders grappled with US inflation data and political turmoil in Westminster.

Sterling rose nearly three cents against the dollar to a staggering $1,379, initially driven by reports of Kwasi Kwarteng’s U-turn over his mini-budget.

But the big event for global markets was US inflation, which came in at a higher-than-expected 8.2 percent in September.

Crucially, core inflation – with energy and food prices disappearing – has continued to rise, reaching a 40-year high of 6.6 percent.

That seemed to bolster bets that the US Federal Reserve will continue aggressive rate hikes, driving the mighty dollar even higher.

It also initially scuttled stocks on Wall Street, where the S&P 500 fell a whopping 2.3 percent.

But there was a sharp turnaround in the hours after the data, with the S&P closing 2.6 percent higher as investors seemed to call the bottom of a market that has seen the New York index see a quarter of its value so far this year. losses.

The dollar’s fortunes also reversed, losing ground against the pound.

It also marked a chaotic day for the euro, which plunged a penny against the greenback before also changing course, reaching $0.9805, a cent higher on the day.

Analysts initially struggled to explain the sudden repositioning. Greg Anderson, Global Head of Foreign Exchange Strategy at BMO Capital Markets in New York, said the initial reaction to US inflation numbers had been exaggerated.

“These are signs of a troubled market, panicked by a slight miss on a data point,” he said.

The volatility marked the latest chapter in a period when the dollar steamroller saw rivals.

Sterling is down 16 percent against the dollar so far this year – with losses mounting following the Chancellor’s mini-budget last month – while the euro is down 14 percent.

This is due to the Fed’s aggressive approach to tackling rampant inflation and the dollar’s status as a safe haven in periods of global uncertainty.

It matters because dollar-denominated imports, such as oil, become more expensive, while countries and companies that have accumulated dollar-denominated debt find it more difficult to repay them.

The US is under pressure to tackle rising prices, which are giving President Biden a headache as the midterm congressional elections approach. But the price the Federal Reserve and other central banks are paying for raising interest rates is the risk of a recession.

However, the director of the International Monetary Fund (IMF), Kristalina Georgieva, spoke at the organization’s meeting in Washington and urged officials to stay on track.

“We can’t possibly allow inflation to become a runaway train — bad for growth, bad for people, bad especially for poor people,” she said.

Georgieva also chided Kwarteng about his planned tax cuts.

She said: ‘Our message to everyone, not just the UK at the moment – fiscal policy must not undermine monetary policy because if it does then the task of monetary policy will only get more difficult and this translates into the need of further tariff increases.’