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Pound rally falters as Fitch downgrades UK credit outlook

Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester, Britain, Septem,ber 21, 2018. REUTERS/Phil Noble
The pound has been under pressure since the chancellor unveiled the mini-budget. Photo: Phil Noble/Reuters

The pound is up marginally against the dollar at just above $1.136 after Fitch cut the UK’s credit rating to ‘negative’.

Sterling added 0.2% on Thursday, remaining above the levels it traded at before UK chancellor Kwasi Kwarteng unveiled his fiscal plans on September 23.

However, between a recovery of the dollar and the downgrade, the pound is struggling to continue its rally.

The pound was slowly recovering after it plunged to a record low against the US dollar last week after the mini-budget sent markets into a tailspin amid concerns about the Truss government’s tax cuts.

"We expect further significant weakness in the pound. With the UK still seen falling into recession and CPI inflation expected to peak lower than previously, we expect BoE rate hikes to fall well short of the Fed," noted analysts at Wells Fargo.

Read more: Fitch drops UK credit outlook to ‘negative’ on tax cut plans

Naeem Aslam at AvaTrade said: “The damage is already done to the British pound and yesterday’s Conservative Party Conference didn’t do much good [as] we saw the pound selling off on the back of the Prime Minister’s speech.”

He added: “the rally is certainly fizzling out and it more and more looks like that the recent surge in prices was nothing more than dead cat bounce. The upcoming Construction PMI numbers which are scheduled to come in at 08:30 GMT will provide more colour about the health of the UK’s economy. If the number is strong, we may a bit of rally but it is unlikely that the rally last for long.

“Overall, traders still very digesting the message from Liz Truss from her speech yesterday.”

Read more: Does Kwarteng's tax U-turn mean interest rate won't rise to 6% as predicted?

Government debt markets also came under renewed pressure in European morning dealings, with the yield on the 10-year UK gilt adding 0.03 percentage points to 4.06% as its price slipped lower.

At least £300bn has been wiped off the value of Britain’s stock and bond markets during Liz Truss’s first month in power.

Bloomberg has calculated that the market value of its UK gilt and inflation-linked gilt indexes has lost around £200bn since the Conservative Party chose their new leader in early September.

Watch: ‘Coup’, chaos and conflict: What we have learned from the Tory conference