As Rishi Sunak becomes UK Prime Minister, pound jumps to a 6-week high

When the price of pound fell to a record low of $1.0697 on September 26, 2022, inflation and Liz Truss's bad economic policies were blamed for the fall. But as the UK has been buzzing with the news of having an experienced Finance Minister as the Prime Minister, the GBP-USD rate has increased slowly and has now risen to a six-week high of $1.16.   

The British pound and UK's ex-Prime Minister Liz Truss are the perfect examples of ''Jack and Jill'' from the childhood nursery poem. Here's how:

• Jack fell down and broke her crown (ie When Ex-PM Liz Truss & Ex-Finance Minister Kwarteng's horrible economic policies were announced) 
• And Jill came tumbling after (ie The British pound) 

Some context: Why did the pound fall in the first place? The British pound had been falling for a few months now, but, in September 2022, the pound fell sharply. September 2022 saw Liz Truss being appointed as UK's new Prime Minister and her Finance Minister introduced economic decisions that did not sit well with many in her own country and many across the world. Truss's Finance Minister Kwarteng announced decisions like large tax cuts and a price cap on energy prices which would be financed by a large amount of debt. But after receiving worldwide criticism of these announcements, Truss fired Kwarteng.

Since the market was already spooked by the prospect of higher government debt, an out-of-control inflation rate, and the Bank of England's interest rate hikes to control inflation, the pound came tumbling after as foreign investors sold off UK bonds. This was followed by the resignation of a couple of ministers and the new Finance Minister who reversed most of Truss's economic decisions. The government's borrowing costs in September 2022 had also risen up which added fuel to the fire and led to a fall in the pound.  

The flip 

UK PM resigned but UK market is up.

What will happen if India PM resigns?

— P R Sundar (@PRSundar64) October 20, 2022

Surprisingly when Liz Truss announced her resignation after a 44-day tenure as UK's Prime Minister, the UK Pound went up. Over the days when the word was buzzing that Sunak would be the new Prime Minister, it looked like hopes were being restored since Sunak is seen as someone who would bring stability to the recent volatile markets. 

Why is the pound rising now that Rishi Sunak is UK's new Prime Minister? 

Over the years, Rishi Sunak has been:

• An investment banker with Goldman Sachs (and multiple other hedge funds).
• The Chief Secretary to the Treasury when Boris Johnson was UK's Prime Minister.
• The Chancellor of the Exchequer ie the Chief Finance Minister of the UK when Boris Johnson was the PM

That's why Sunak is seen by investors as a safer pair of hands for keeping the British economy stable. The current Finance Minister Jeremy Hunt, who reversed previous economic budget decisions made by Truss's Finance Minister, will keep his job and is expected to set out his economic plan for tax and spending on October 31.

Sunak also pledged to fix "mistakes" made under Liz Truss's leadership and lead the country out of its current economic crisis when he made his first speech as Prime Minister, thus raising positive sentiment among citizens.

Also, luckily for Sunak, government borrowing costs fell back to levels seen just before the mini-budget. The interest rate on bonds due to be repaid in 30 years' time dropped to 3.6% and the yield on bonds due to be repaid in five years' time fell to 3.7%. Thus the pound sterling surged to $1.16 on October 26, 2022, the highest it has been in the last 6 weeks.