Cabinet reshuffle: Why did the pound go up after Sajid Javid resigned?

The value of sterling shot up and UK government borrowing costs rose in response to the surprise resignation of the Chancellor of the Exchequer, Sajid Javid, on Thursday.

The pound jumped more than half a per cent after it emerged at midday that Mr Javid had tendered his resignation in response to a demand from 10 Downing Street that he merge his advisory team with that of the Prime Minister.

Sterling, which had been trading at $1.2982 before the news, rose to $1.3041 within the hour. 

By mid afternoon it had extended its gains to $1.3067, putting the currency on course for its largest daily rally of the month.

UK 10-year market borrowing rates – known as gilt yields – also rose from 0.61 per cent to 0.69 per cent in response to the news.

Several currency analysts said the sharp market moves suggested traders were expecting more public spending in the 11 March Budget from the new chancellor, Rishi Sunak, relative to what Mr Javid – who had signalled a determination to keep public spending on a relatively tight leash over the Parliament – would have implemented.

Rishi Sunak bounce?

Reuters Eikon

“The new chancellor will want to put his own mark on the Budget leading us to believe it will be much more expansionary in nature,” said David Zahn of the investment firm Franklin Templeton.

“Overall, the direction of travel for the government is clear and this reinforces our view that gilt yields should rise as more is revealed about the upcoming Budget.”

Paul Dales of the consultancy Capital Economics pointed to the fact that Mr Sunak is closer than Mr Javid to 10 Downing Street, which is presumed to be in favour of a looser fiscal programme, involving more government borrowing.

“Sunak’s previous votes in Parliament suggest his views are perhaps more aligned with those of the Prime Minister and his chief special adviser, Dominic Cummings, than Javid’s,” he  said.

“His voting history shows he’s an ardent Brexiteer, supports reductions in corporation tax, cuts to capital gains tax and he’s gone on the record as favouring infrastructure investment.”

The idea that extra government spending and tax cuts push up the value of the pound is based on the assumption that the extra money will boost short-term UK economic growth and, ultimately domestic interest rates, which will also increase international demand for sterling.

Sam Tombs of the economic analytics firm Pantheon noted that investors now see only a 35 per cent chance that the Bank of England will cut interest rates by June, down from 42 per cent before Mr Javid’s resignation.

However, some market-watchers cast doubt on the idea that Mr Sunak’s arrival would result in a major change in public spending levels relative to current plans, which were already set to include substantially greater capital investment spending for infrastructure in the North of England and Midlands.

“I very much doubt it will in fact have any material implications for near-term borrowing, investment and [government bond] issuance numbers,” said John Wraith, the head of UK rates strategy at UBS.

Treasury sources said there were no current plans to move the Budget back from its 11 March date although they added that this and other questions would be considered by the new Treasury team.

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