"Liz Truss’ pledge to freeze energy costs brings optimism on her first day, while the Nasdaq underperforms despite stronger service PMI data, Joshua Mahony, senior market analyst at online trading platform IG said.
"The pound has outperformed many of its peers today, with Liz Truss delivering a much-anticipated shock and awe announcement aimed at bringing energy prices under control."
According to reports, the incoming PM has drafted plans to freeze energy bills for UK households at or below the current level of £1,971 ($2,300), in an effort to help with soaring cost of living.
Truss has reportedly settled on a system that will help avert a planned sharp rise in the price cap, which is due to jump 80% from October to £3,548 a year.
Under the proposals, Truss will effectively sideline energy regulator Ofgem and abolish the price cap.
Instead, the government will create a new unit price that Britons will pay for electricity or gas, with energy suppliers expected to take out government-backed loans to subsidise bills.
Sterling (GBPUSD=X) rose from a two-year low on the back of Truss's energy plan as traders are digesting Truss' energy bills policy, which Bloomberg reported could cost £130bn over the next 18 months.
The pound was up 0.7% against the dollar to $1.598 in early trade after sliding to its lowest since March 2020 on Monday.
Michael Hewson, chief market analyst at CMC Markets, said: "The pound managed to recover off its intraday lows yesterday in the aftermath of yesterday’s news, however the key test will be on how markets view the government's next steps when it comes to dealing with the current crisis.
"Opinion appears mixed on whether all of the bad news is currently priced in to the pound, however it does appear to have squeezed quite a bit higher after the lows of yesterday.
"While some short-term borrowing is unavoidable given the current challenges, the main focus will be on what steps the government intends to take to keep energy prices down and deal with the UK’s longer term energy security."
Across the Atlantic, US equities traded in the green after being closed for Labor Day on Monday and amid concerns that the Federal Reserve's path of rate increases could push the economy into a recession.
In Asia, stocks finished in mixed territory as central banks’ monetary tightening and Europe’s energy crisis weighed on sentiment.
Watch: Liz Truss' speech after being made new party leader and next PM