NewsEbury Weekly FX Market Update: Sterling rallies after UK government’s dramatic tax U-turn

The pound stole the spotlight in yet another volatile week of FX trading.

Sterling rallied on news that Prime Minister Truss had fired Kwasi Kwarteng from his Chancellor of the Exchequer position, with UK assets reacting positively to the government U-turning on almost all of the tax cuts promised just three weeks ago. This was enough to propel the UK currency to the top of the FX performance rankings, as almost the only major currency to hold its own against the dollar. More bad news on the inflation front sent US yields soaring again and further fuelled the dollar rally.

The week’s best performers were the Eastern European currencies, which were buoyed by the Hungarian National Bank’s draft of extraordinary measures to combat forint depreciation, including massive rate hikes targeted at currency markets. Considering the negative inflation news, risk assets and the common currency held up remarkably well to end the week nearly unchanged.

A light economic calendar elsewhere means that the focus this week will once again be on the UK bond and currency markets, now that the Bank of England has promised to stop supporting the long-term bond market. The inflation report out of the UK on Wednesday is sure to add to the market drama. A slate of public speeches by Federal Reserve officials starting on Tuesday should also drive markets, as the expected Fed funds terminal rate inches closer to 5%.

Read more: Ebury Weekly FX Market Update