Volatile sterling surges on reports of potential UK fiscal plan U-turn

Sterling jumped on Thursday on a media report that the British government is discussing making changes to fiscal plans announced last month, while investors awaited the impending end of the Bank of England's support for the bond market.

The yen languished near a fresh 24-year low, while markets were also on edge ahead of U.S. inflation data due later in the day which could give possible clues on how much higher the Federal Reserve will push interest rates.

Sterling surged 1.5% to a one-week high against the dollar at $1.1267 by 1205 GMT after Sky News reported the UK government was looking at which parts of its tax-cutting package might be ditched in a further U-turn by Prime Minister Liz Truss.

The government said on Wednesday that it would not reverse its plans for wide-ranging tax cuts or reduce public spending, which have rocked the country's financial markets as it remains unclear how the moves will be funded.

"UK markets are rallying on the back of - as yet not officially confirmed - reports that the government is looking at ways of reversing or significantly scaling back its package of unfunded tax cuts," said Stuart Cole, head macro economist at Equiti Capital.

On Wednesday, the pound fell to an almost two-week low but rebounded after the Financial Times reported that the BoE had signalled privately to lenders that it was prepared to extend its emergency bond-buying programme beyond Friday's deadline if market conditions demanded it.

However, the central bank later officially reiterated that its programme of temporary gilt purchases will end on Oct. 14.

UK pension schemes are racing to raise hundreds of billions of pounds to shore up derivatives positions before the BoE's Friday deadline.

Also supporting sterling, longer-duration British gilt yields fell on Thursday, easing back from 20-year highs struck on Wednesday before the BoE bought 4.4 billion pounds ($4.9 billion) of debt at its daily reverse auctions - which are due to end on Friday.

"We can expect potential market take-up to continue to increase as market participants prepare for the BoE to exit the market... We can expect the market to focus on the risks of extended gilt market volatility and potential contagion risks," said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

Elsewhere, the yen struggled against the dollar, trading at 146.7, a whisker away from an August 1998 low of 146.98 per dollar hit on Wednesday, and well past last month's low of 145.90 per dollar which prompted Japanese authorities to intervene to buy the yen.

The yen "has lost its safe haven appeal," said Rodrigo Catril, a senior currency strategist at National Australia Bank.

"There's been this sense of cautiousness around that previous high (for dollar/yen) ... now they've punched through it, and therefore it feels like you have a little bit more room to keep going, because there hasn't been any intervention."

U.S. INFLATION IN FOCUS

Feeling the pressure of the strengthening pound, the U.S. dollar index, which measures the greenback against a basket of peers, fell 0.4% to 112.77, but was not too far from a 20-year high touched two weeks ago.

Investors were focusing on U.S. core inflation data due later, which is projected at 6.5% year-on-year in September. Data showed on Wednesday that U.S. producer prices increased more than expected last month.

Minutes from the Federal Reserve's policy meeting last month showed that officials agreed they needed to raise interest rates to a more restrictive level - and then keep them there for some time - to meet their goal of lowering "broad-based and unacceptably high" inflation.

The euro rose 0.43% to $0.9743.

(Reporting by Joice Alves, additional reporting by Rae Wee; Editing by Raissa Kasolowsky and Susan Fenton)