“The U-turn represents a concerted effort to soften the narrative regarding the government’s economic agenda but little to change the direction,” said Neil Mehta, a portfolio manager at BlueBay Asset Management. “This dynamic should support the pound in the short-term, but we think this will be short-lived, as confidence in the government is shot and policies come home to roost over a difficult winter for the U.K. economy.
The late September fiscal package sent the pound to a record low a week ago and led to the biggest-ever selloff in long maturity bonds, forcing the Bank of England to intervene to stop forced selling by pension funds to cover margin calls. There’s still uncertainty over what will happen when the BOE halts its bond buying on Oct. 14.
Wall Street banks have already predicted the pound will hit parity with the dollar this year. In the options market, traders are the most negative on the currency against the greenback over the next three months since the 2016 Brexit vote, while one-year sentiment is worse.“Market reaction to the U.K.’s U-turn on tax was muted because it’s a small part of the overall package,” Shaan Raithatha, senior European economist at Vanguard, said in a Bloomberg Television interview.