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Pound hits one-week low on gloomy economic data and political chaos

The pound struggled to hold on to gains from the previous session. Photo: Matt Cardy/Getty
The pound struggled to hold on to gains from the previous session. Photo: Matt Cardy/Getty

The pound (GBPUSD=X) slid to a one-week low on Friday on the back of weak economic data and political uncertainty, wiping out the brief rally to $1.13 after Liz Truss resigned as prime minister on Thursday.

Sterling fell 1.1% to marginally above $1.11 in noon trade after the latest UK public finances figures painted a gloomier picture.

"The pound has come under pressure once again, with political uncertainty building on economic concerns," said Joshua Mahony, senior market analyst at online trading platform IG.

Britain's deficit soared to £20bn in September as debt interest payments continued to surge amid the highest price rises in 40 years, the Office for National Statistics (ONS) said.

Read more: FTSE tumbles as the Conservative Party scrambles to replace Liz Truss

Last month's borrowing surge marked the second highest September figure since monthly records started in 1993, and was only surpassed by the amount borrowed during the pandemic. It was also above the £14.8bn forecast by the Office for Budget Responsibility (OBR) in March.

The jump in borrowing was driven by debt interest payments, which climbed £2.5bn to £7.7bn compared with the same month last year.

Friday's figures come before chancellor Jeremy Hunt unveils a new tax and spending plan at the end of the month after he scrapped most tax cuts announced in the mini-budget.

Hunt indicated that he will do "whatever" it takes to get the public finance back on track, a day after Liz Truss resigned as UK prime minister.

"To stabilise markets, I’ve been clear that protecting our public finances means difficult decisions lie ahead," the chancellor said.

"We will do whatever is necessary to drive down debt in the medium term and to ensure that taxpayers’ money is well spent, putting the public finances on a sustainable path as we grow the economy."

Higher Interest payments reflect the increase in the retail price index to which index-linked gilts are linked. In September, RPI inflation increased to 12.6%.

Read more: Interest rate rise might be lower than markets expect, says Bank of England official

The UK retail sector recorded a sharp drop as sales were hit by consumers's cost of living concerns and shop closures due to the Queen's funeral.

ONS figures revealed that retail sales volumes dipped by 1.4% last month, below the 1.7% decline in August, but up on the 0.5% expected by economists.

The raft of gloomy economic data saw the yield on 10-year UK gilt rise as much as 13 basis points to 4.04%.

Taxpayers also took the first ever took loss from Bank of England bond holdings. The loss to taxpayers last month was £156m, ONS data showed. And interest payments on Threadneedle Street's holdings totalled almost £1.6bn — above the roughly £1.4bn received in coupon income.

Read more: FTSE 100 tumbles as the Conservative party scrambles to replace Liz Truss

Danni Hewson, financial analyst, at AJ Bell, said: "Never have gilt yields garnered so many headlines but the importance of fiscal credibility to a governments ability to run a country has become dinner table talk.

"The latest public sector finances show the UK government is still spending more than it rakes in, although the tax take has risen considerably compared to the same time last year.

"Index linked gilts account for almost a quarter of government debt and with inflation still in the red zone debt interest has shot up.

"With recession now inevitable there are huge problems for the government to overcome once it deals with the little issue of who will walk through, what’s become of late, the revolving door at No10."

Watch: How does inflation affect interest rates?