Pound on the Ropes as Economic Plan Puts PM Truss at Odds with the BoE

GBP Key Points:

  • Outlook: Bearish.
  • Energy Bill Bailout to Cost GBP 60 billion Over Six Months.
  • Economic Plan Sends Pound Slumping as Inflation Concerns rise.
  • Markets Now Pricing a 100bp hike in November.

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GBP Week in Review

The GBP had a disappointing week against its major counterparts with the Bank of England’s (BoE) underwhelming 50bp hike adding to its woes. As markets prepared to hear from the new UK Chancellor Kwasi Kwarteng on Friday regarding the economic plan and the cost of the energy bailout, no one could have predicted the reaction that followed. We saw the 10-year Gilts yields jump 20 points while the pound slumped 250-odd pips against the US dollar.

Prime Minister Truss followed through on her promise of an unorthodox economic policy in order to stimulate the economy. The recent energy package announced is set to cost the UK around GBP 60 billion over six months with the Chancellor stating that the cost of inaction would be greater than the cost of the scheme. This was followed by the largest tax cuts package since 1972 with both workers and companies set to benefit. Kwarteng stated that the move is to prioritize growth as the economy lags behind its G-7 peers. The Chancellor went further by scrapping a cap on bonus payments for bankers in order to make the UK more attractive for leading banks. The Chancellor also surprised with a 2.5% a year growth target, a level not seen for more than a decade. The initial market reaction to this mini-budget was not positive as most economists see similarities between this and Nigel Lawson’s 1988 budget. Lawson’s budget did stimulate the economy but also resulted in higher inflation, with interest rates peaking around 15% in an effort to combat price pressures. Could history be about to repeat itself?

The Bank of England and Rate Hike Probabilities

Bank of England policymaker Jonathan Haskel spoke at a panel on Thursday where he warned the potential stimulus package could complicate matters for the BoE by adding to its inflation concerns. Judging by the response from markets one would be hard pressed to disagree with him. Following the speech by Chancellor Kwarteng money markets went into overdrive with markets now pricing in a 100bp hike from the BoE when they meet again on November 3rd. Pricing for next year has a peak rate of 5.4% compared to 4.75% this morning.

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Markets Week Ahead: Event Risk Trading Strategy

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UK Economic Calendar for the Week Ahead

The UK economic calendar is set to enjoy a quiet week as economic data will be sparse. Over the course of the week, there is one ‘high’ rated data release, whilst we also have three ‘medium’ rated data releases.

Here is the one high ‘rated’ event for the week ahead on the economic calendar:

  • On Friday, September 30, we have GDP Growth Rate YoY Final (Q2) at 06h00 GMT.

For all market-moving economic releases and events, see the DailyFX Calendar

GBPUSD D Chart, September 23, 2022

Source: TradingView, Prepared by Zain Vawda

Chart Description automatically generated

GBPUSD Outlook and Final Thoughts

GBP accelerated its decline following Friday’s mini-budget, particularly against the greenback. FX markets now see an 18% chance that the pound will hit parity against the US dollar before the year is out. The BoE’s underwhelming rate hike in contrast to the hawkish forward guidance released by the US Fed has left the Pound vulnerable.

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Friday’s 250-odd pip sell-off on GBPUSD has seen the pair within a whisker of the psychological 1.1000 Key level whilst still trading below the 20, 50, and 100-SMA. The only positive for the GBP lies in the fact that the RSI is in oversold territory on the daily, weekly and monthly charts. This of course is no guarantee of a retracement, but should we see some dollar weakness next week we could retest the resistance level around the 1.1250 area. A deeper retracement would be more desirable for would-be-sellers, looking at the psychological 1.1500 level which coincides with the 20-SMA.

Alternatively, should we see a candle break and close below the 1.1000 psychological level we could open up a test of the 1.0700 and 1.0500 support areas.

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— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: ” @zvawda

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