Sterling rose on Monday on news the government would scrap a proposal to remove the 45p rate of income tax. 

In a statement on Monday, Chancellor Kwasi Kwarteng said: "We get it, and we have listened. It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country.” 

The Pound to Dollar rate edged up 1% to $1.1250 on the announcement, trimming gains to $1.12 at the time of writing. In addition, the Pound to Euro rate increased two-thirds of a percent to 1.1430.

"My estimates suggest $GBPUSD should be trading around 1.13-1.14 if the entire 'Kami-Kwasi budget' risk premium is unwound. Seems reasonable we get there in the next few sessions… 45p tax cut was the nail in the coffin for the Pound last week. Taking this out is a big deal," according to Viraj Patel, Vanda Research macro strategist.

The Pound suffered a sharp drop as the government unveiled plans to drop the 45p tax band to be funded via an increase in borrowing, Pound Sterling Live reports.

"The market’s initial reaction is relief. It’s just £2bn of the £45bn of tax cuts so it’s not a big deal but it shows the government is bowing to pressure. This probably won’t be enough on its own to restore confidence – whether that’s reversing more tax cuts or plans to reduce spending. Markets will still want their pound of flesh,” said Lee Hardman, MUFG currency analyst.

Furthermore, the government’s U-turn increases the risk of Pound-Dollar trading to parity, says Chris Turner, ING’s Global Head of Markets and Regional Head of Research for UK & CEE. He believes there is potential for a new Pound-Dollar trading range of between 1.1000 and 1.1350, whereas Euro-Pound may find support under 0.8700, the Pound Sterling Live report adds.