Sterling fell as economic and political uncertainty weighed today after the resignation of British Prime Minister Liz Truss, following the unravelling of her vast planned tax cuts which crashed the pound and sent borrowing costs soaring.

The Conservative Party will now elect a new leader within the next week.

That contest is likely to pit ex-finance minister Rishi Sunak against Penny Mordaunt but could also see the return of Boris Johnson.

Analysts reckon that markets will need some time to thoroughly shake off the political risk premium built over recent weeks.

Significant challenges remain for the UK, including how the Bank of England tackles inflation in an economic slowdown.

British shoppers reined in spending more sharply than expected in September, underscoring the challenge facing new finance minister Jeremy Hunt and whoever succeeds Truss.

Sterling fell 0.5% to $1.1174 and was down 0.55% to 87.58 pence per euro.

The greenback strengthened broadly as US Treasury yields climbed to new multi-year peaks.

Michael Hewson, of CMC Markets, said global markets initially reacted quite positively when the British Prime Minister announced she would be stepping down.

"Gilt yields fell back, the 30 year fell as low as 3.85% so that is well below the highs that we saw in September," he said speaking on Morning Ireland.

"But the ten year edged higher and that was largely because US Treasury yields are also edging higher because of the dire inflation outlook we are seeing and the fact that the Federal Reserve is likely to do another 75 basis point hike in November. "

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The reversal of the tax cut proposals early this week was more important than Truss's resignation for markets.

After the publication of the mini-budget, Mr Hewson said the markets "fretted" about the possibility that the UK was going on a spending spree.

"It was a dire reaction," he said.

"The markets didn't react well to this, because there was a significant amount of opaqueness about the targets and how they were going to be funded.

"UK gilt yields spiked aggressively and the 30 year gilt yield went to its highest level in 25 years in the space of three or four days, and the ten year gilt yield also spiked," he added.

On Monday, Hunt scrapped Truss's economic plan, scaling back her vast energy support scheme.

"A political reset would continue to erase the risk-premium embedded in UK assets, particularly if front-runner Rishi Sunak becomes prime minister and implements more orthodox conservative economic policy," Neil Mehta, Portfolio Manager at BlueBay, said.

"This will likely embolden gilts and the pound, but the longer-term challenges facing the UK economy on cost of living and inflation will unlikely abate - with a Labour government in the waiting," he added.

Hunt reiterated today that the government would do "whatever is necessary to drive down debt in the medium term," responding to the latest data on public sector finances.

Additional reporting by Gill Stedman