Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The UK government has staked its reputation on providing stability for investors, so the scenes in parliament yesterday, which appeared to show the Chancellor in distress, upset markets. The pound fell sharply against the dollar and the euro, and government borrowing costs jumped. The worry is that the Chancellor risks falling off her fiscal tightrope, which she has so carefully being tip toeing along, following the revolt by back bench MPs.
Investors are worrying that the Treasury may encounter more opposition to its plans to trim spending, in an effort to abide by its fiscal rules and keep bond markets onside. This isn’t a mega strop out, but it’s a warning sign lobbed into Westminster. The pound remains around 12% higher against the dollar since the start of the year, putting today’s falls into context.
Gilt yields did start to edge downwards, after movements on the other side of the pond. Treasury yields, which indicate US borrowing costs, retraced earlier moves upwards after a weaker than expected employment report led to speculation that the Federal Reserve may move more quickly to cut interest rates to support a slowing economy. The lower pound has helped lift the FTSE 100, given that it can increase the value of overseas earnings of multinationals that report in sterling, but the fiscal uncertainty is likely to be holding back some gains.’’
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