The pound rose against the dollar after Boris Johnson announced he would be replaced as prime minister.
Sterling rose more than 0.4% to $1.2 as traders priced in the prospect of an end to months of chaos under Mr Johnson. He will remain in his post until the Conservative Party elects a new leader.
As markets reacted to the news, sterling regained some of the ground it lost this week, but remains more than 10 percent down against the US currency.
The pound hit a two-year low against the dollar on Tuesday amid growing fears about the future of Britain’s economy.
The dollar strengthened in response to a series of big interest rate hikes by the US Federal Reserve.
The weak pound serves to push up the prices of goods the UK imports, such as energy, food and manufactured goods.
Consumer price inflation hit 9.1% in May and is expected to rise to 11% later this year, meaning households face big falls in living standards as wages fail to keep up with rising prices of basic goods.
While the country’s new leadership promises to bring some degree of political stability, the new prime minister will still face a long list of economic problems.
Consumer confidence hit an all-time low, according to a year-long survey by Growth from Knowledge (GfK), while car sales fell to their lowest June since 1996. The construction industry is also slowing, new industry data shows.
The Bank of England said on Tuesday that the outlook for the UK economy had “deteriorated materially” after Russia invaded Ukraine.
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