FX focus: Pound halts slump but recovery could be short-lived

George Osborne's plans to lower the corporation tax provides some much-needed relief to the pound.

The pound brought its steepest two-week fall in more than seven years to a halt on Monday (4 July), after George Osborne pledged to cut the corporation tax to less than 15%.

The chancellor outlined an ambitious plan to build a "super-competitive economy" as Britain exits the European Union. In an interview with Financial Times, Osborne stressed the need for Britain to be "open for business" and indicated he was ready to strengthen economic ties with China and to reduce the UK's corporate tax from the current 20% to 15%.

The news provided a timely boost to sterling, which, at the time of writing, was up 0.07% against the US dollar at $1.3276. The UK currency had relinquished part of the gains recorded earlier in the day against both the greenback and the euro, with the latter trading 0.07% higher against the pound at 0.8393p.

With the Bank of England's Financial Stability Report due out on 5 July, analysts believe it is too early to say whether the pound's fragile recovery will last.

"The BOE's Financial Stability Report will be interesting – an opportunity for the BOE to address the threats posed by leaving the EU," said Kit Juckes, global head of FX strategy at Societe Generale.

"But as for the pound – any respite is still a chance to sell. The press is tempted to interpret a sterling-induced bounce by the FTSE 100 as a sign that the economic fallout of the decision to leave the EU won't be as bad as some feared but that's complacent thinking."

Elsewhere, the dollar gained 0.08% against the yen to ¥102.60, but slid slightly against the euro, exchanging hands at $1.1142.

Meanwhile, the Australian dollar lost 0.1% to 74.88 US cents after an election Saturday saw neither of the major parties with enough seats to form a government, leaving the country facing the prospect of a hung parliament.