The pound rose against the dollar on the news of Prime Minster Liz Truss’s resignation, but then quickly shed some of the gains.
Sterling touched $1.13 at one point before slipping back.
UK government borrowing costs had been falling ahead of the PM’s statement, but then began to edge back up.
Ahead of the statement, one analyst had said said the markets were “watching in a kind of stunned, open-mouthed horror” at political events.
“The problem we’ve got is that the last couple of weeks has really destroyed the image of political competency and that’s one of the key elements to make any economy work,” Bill Blain of Shard Capital told the BBC’s Today programme.
“There are three things you need: you need a stable currency, you need a sustainable bond market and you need competent politics, and because it looks like competent politics are broken that’s creating the volatility that we’re seeing in markets.”
Government borrowing costs rose sharply last month after it unveiled a tax-cutting mini-budget without saying how it would pay for it.
But these costs then fell back after the Bank of England stepped in with its emergency support programme, and after Jeremy Hunt reversed nearly all the mini-budget measures when he became chancellor.
The government can raise money by selling bonds – also known as gilts – to investors. Bonds are a bit like an “I owe you”.
Typically, the government agrees to repay the investor on a certain date in the future. In the meantime it pays interest on the loan.
However, the mini-budget hit confidence in bonds, and led to investors demanding a much higher rate of interest in return for investing in them. Some bonds halved in value.
The interest rate – or yield – on UK government bonds for borrowing over a 10-year period climbed above 4% at one point on Thursday morning, but then fell back steadily as speculation grew about the possible departure of Liz Truss.
However, following the PM’s statement, the rate edged higher to about 3.8%.Follow us on social media