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FTSE 100 closes in the red as pound rebounds from record low

The FTSE 100 finished in the red as the pound bounced back. Photo: Michael M. Santiago/Getty
The FTSE 100 finished in the red as the pound bounced back. Photo: Michael M. Santiago/Getty

European shares closed in the red on Tuesday, losing ground after a battering in the previous sessions.

The FTSE 100 (^FTSE) lost gains, down 0.5% after the closing bell, France’s CAC (^FCHI) was 0.3% lower on the day and the DAX (^GDAXI) tumbled 0.7% in Frankfurt.

"European stocks are on the rise despite concern over gas imports into Europe. While the UK mini-budget does raise risks of higher-for-longer rates, traders are holding off until we see whether the BoE opt to move," Joshua Mahony, senior market analyst at online trading platform IG said.

Read more: Pound edges up against dollar but outlook still gloomy

The pound (GBPUSD=X) fell back from the $1.08 high in early trade, up 0.7% to trade at $1.07 following Monday’s record low of $1.03 against the dollar.

Bank of England chief economist Huw Pill hinted at a "significant" monetary policy response to come as he pushed back against calls for emergency action.

"Sterling stabilised slightly, although still sharply down against the US dollar over recent days, as the Bank of England reiterated its commitment to raising interest rates further, although this fell short of an emergency move which some had expected," Richard Hunter, head of markets at Interactive Investor said. "Even so, the statement restored some relative calm, with an expectation that the next rate rise in November could be substantial, thus providing some support to the beleaguered currency."

The Bank of England opted not to intervene with an emergency rate rise on Monday after sterling crashed, saying it didn't expect to take any action until its next meeting in November.

Instead, the Bank said it would assess developments closely and would not "hesitate" to increase rates to bring inflation back to its 2% target.

However, markets doubt governor Andrew Bailey can avoid an emergency meeting, with traders betting there's more than a 40% chance of it hitting parity with the greenback by the end of the year.

Read more: Pound run: BoE chief economist signals 'significant monetary response'

The chaos was in the wake of the Kwarteng’s mini-budget last week, which set out the biggest package of tax cuts for 50 years, and comments of further tax cuts to come over the weekend.

The Treasury department issued a statement shortly before the BoE's statement in an effort to calm market turmoil, pledging to set out 11 Downing Street's approach to managing the public finances.

In a meeting with City chief on Tuesday, Kwarteng argued that supply side reforms would cool inflation, as increased capacity brings down prices.

He told bosses that he was confident that the long-term strategy to drive economic growth through tax cuts and supply side reform would work.

Read more: Why has the pound fallen and what does this mean for you?

Across the Atlantic, US benchmarks pushed higher despite concerns about the pace of global growth and the price of the Federal Reserve's efforts to slow inflation.

The Dow Jones (^DJI) added 0.1% after falling into a bear market for the first time since the start of the pandemic in the previous session.

Wall Street’s S&P 500 (^GSPC) advanced 10.69 points, or 0.4%, to 3665.73, while the tech-heavy Nasdaq (^IXIC) surged 0.8% at London's close.

Asian stocks finished in mixed territory overnight after the slump on Wall Street.

In Tokyo, the Nikkei (^N225) advanced 0.5%, while the Hang Seng (^HSI) fell 0.2% in Hong Kong and the Shanghai Composite (000001.SS) gained 1.4% in mainland China.

Watch: Citi Ebrahim Rahbari on Pound Meltdown