Pound Falters on Kwarteng Dismissal Ahead of Truss Announcement

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By Geoffrey Smith

AiVIF.com -- The pound fell and U.K. government bonds extended their rally on Friday after Prime Minister Liz Truss fired Kwasi Kwarteng as Chancellor of the Exchequer.

She's now expected to abandon much of their program of unfunded tax cuts at a press conference that has been delayed from its scheduled start of 08:00 ET (12:00 GMT).

Kwarteng had just arrived back in the U.K. after flying home early from the International Monetary Fund's autumn meeting, where the government's plans - which involved the biggest tax cuts in 50 years of U.K. politics - were criticized by senior Fund officials.

Kwarteng confirmed his dismissal in a tweet that contained his resignation letter, which began "You have asked me to stand aside as your Chancellor. I have accepted."

Reuters reported that Truss will name former Foreign Secretary and Health Secretary Jeremy Hunt to replace her long-time friend at No. 11 Downing Street.

By 08:20 ET, the pound was near its low for the day at $1.1204, down 1.1% on the day. The yields on U.K. government bonds, meanwhile, continued to plummet, in anticipation that the government's borrowing requirement will be scaled back under a new Chancellor, the fourth the U.K. will have had in as many months.

Bonds were also supported by a last day of interventions from the Bank of England, which will end its outright purchases of Gilts later Friday. The Bank had earmarked up to £65 billion for stabilizing the bond market after Kwarteng's ill-fated 'mini-budget' in September triggered a rout in government bonds that assumed self-reinforcing dynamics as pension funds sold ever-larger quantities of Gilts to meet margin calls on interest rate derivatives.

The Bank had warned that disorderly conditions represented "a material threat to U.K. financial stability," and pledged to restore order. However, it also announced that it will revert to repo operations from next week, aiming to avoid any further boost to the money supply at a time when inflation is already running at nearly 10%.