British pound Important points:
- Outlook: bearish.
- Energy bill bailout at cost British pound 60 billion over six months.
- Economic plan sends pound tumbling as inflation worries mount.
- Markets are now pricing in a 100bp hike in November.
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British pound week in review
The GBP had a disappointing week against its major counterparts, with the Bank of England’s (BoE) underwhelming 50 basis point hike adding to its woes. As markets braced themselves to hear from Britain’s new Chancellor Kwasi Kwarteng on Friday about the economic plan and the cost of the energy bailout, no one could have predicted the reaction that would follow. We saw 10-year gilt yields rise 20 points while the pound fell a good 250 pips against the US dollar.
Prime Minister Truss delivered on her promise of unorthodox economic policies to boost the economy. The recently announced energy package is expected to cost the UK around £60bn over six months, with the Chancellor saying the cost of inaction would exceed the cost of the programme. This was followed by the biggest tax cut package since 1972, designed to benefit both workers and businesses. Kwarteng explained that the move is to prioritize growth as the economy lags behind its G-7 peers. The Chancellor went further by removing a cap on bankers’ bonuses in a bid to make the UK more attractive to leading banks. The Chancellor also surprised with a growth target of 2.5% per year, a level not reached for more than a decade. The initial market reaction to this mini-budget was not positive, as most economists see similarities between it and Nigel Lawson’s 1988 budget. Lawson’s budget, while stimulating the economy, also led to higher inflation, with interest rates peaking at around 15% to counter price pressures. Could history repeat itself?
That Bank of England and rate hike probabilities
Bank of England policymaker Jonathan Haskel spoke at a panel on Thursday where he warned that the potential stimulus package could complicate matters for the BoE by increasing its inflation concerns. Judging by the markets’ reaction, it would be hard to disagree with him. Money markets went into overdrive following Chancellor Kwarteng’s speech with markets now pricing in a 100bp hike from the BoE when they meet again on 3rd November. Next year prices are peaking at 5.4% compared to 4.75% this morning.
( 13:09 GMT )
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Markets Week Ahead: Event Risk Trading Strategy
UK economic calendar for the coming week
The UK economic calendar is set for a quiet week as economic data will be sparse. During the week there is one “High” rated data release, while we also have three “Medium” rated data releases.
Here’s the one highly rated event for the coming week on the economic calendar:
- On Friday 30 September at 06:00 GMT we have the final GDP growth rate YoY (Q2).
All market moving economic news and events can be found at DailyFX Calendar
GBPUSD D card, September 23, 2022
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GBPUSD Outlook and final thoughts
The GBP accelerated its decline after Friday’s mini-budget, particularly against the greenback. FX markets now see an 18% chance of the pound reaching parity against the US dollar before the year ends. The BoE’s overwhelming rate hike in contrast to the US Federal Reserve’s dovish forward guidance has left the pound vulnerable.
GBPUSD’s sell-off of around 250 pips on Friday has brought the pair just a hair’s breadth below the key psychological 1.1000 level, while still trading below the 20, 50 and 100 SMAs. The only positive for GBP lies in the fact that the RSI is floating in oversold territory on the daily, weekly and monthly charts. Of course, this is not a guarantee of a retracement, but should we see dollar weakness next week, we could retest the resistance level around the 1.1250 area. A deeper retracement would be more desirable for potential sellers given the 1.1500 psychological 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 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