Pound rallies as Javid resignation prompts fiscal speculation

[LONDON] The pound rallied while gilts fell after Chancellor of the Exchequer Sajid Javid resigned, causing speculation the UK may move toward more fiscal stimulus.

UK markets reacted after the country's finance minister quit after a face-to-face row with Prime Minister Boris Johnson inside 10 Downing Street. Mr Javid's replacement with Rishi Sunak led to speculation there may be increased fiscal spending as Mr Johnson moves away from Mr Javid's already loosened fiscal rules.

"The initial reaction has been weaker sterling but we are now seeing a rally to a new high," said Adam Seagrave, head of global sales trading at Saxo Capital Markets UK Ltd. "This is presumably the market interpreting the announcement as Johnson wanting advisors who are more willing to back aggressive fiscal stimulus."

The pound traded at US$1.3040, up 0.6 per cent as of 12.38 pm in London, setting it on course for the biggest rally this month. The yield on UK 10-year government bonds rose 4 basis points to 0.65 per cent.

Nonetheless, some analysts noted the longer-term changes to British government spending remain unclear, perhaps making the move in UK government bonds overly-hasty. Mr Sunak, a former Goldman Sachs banker, was previously chief secretary to the Treasury.

"Gilt reaction may be on assumption Boris Johnson's office has a stronger hand on the fiscal tiller than thought, and that adherence to fiscal rules may become looser than Javid would have been prepared to countenance," said John Wraith, the head of UK rates strategy at UBS Group AG . "I very much doubt it will in fact have any material implications for near-term borrowing, investment and issuance numbers."

Mr Javid stood for leadership of the Conservative Party against Mr Johnson last year, coming fourth in the race, before being appointed Chancellor.

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