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GBP/USD jumps as Sunak takes the reinsThe pound has posted sharp gains today. In the European session, GBP/USD is trading at 1.1353, up 0.66%. Rashi Sunak is the new Prime Minister of the UK, the latest move in what has been a dizzying pace of political developments in the UK. Lizz Truss managed to stick around 10 Downing Street for a mere 44 days, after a mini-budget with unfunded tax cuts was a disaster and forced her to pack her bags. Sunak, a former finance minister, should fare better, but all agree that he faces an uphill battle in righting the leaky economy. Given all that has transpired over the past few weeks, if Sunak can re-establish a feeling of normalcy in the government, that will be a modest achievement. The challenge for Sunak will be immense. Inflation is running at 10% and the weak UK economy may already be in recession. The most recent data shows consumer spending, manufacturing and business activity on the decline. The cost-of-living crisis is getting worse and real earnings are falling, which could lead to worker unrest. Sunak has shown he is a capable politician but will need to keep the Conservative party united behind him if he is to succeed, with the opposition hoping they can capitalize on the political havoc and force a general election. The markets have reacted favorably to Sunak taking over as Prime Minister, as the British pound and UK gilts are higher today. Next week will be anything but dull, as the government is scheduled to deliver a budget on October 31st and the Bank of England holds its policy meeting on November 3rd. With inflation showing no signs of peaking, the BoE is widely expected to deliver an oversize interest rate in order to curb inflation.  A 0.75% hike is most likely, although there is an outside chance of a supersize full-point increase. GBP/USD tested resistance at 1.1373 earlier in the day. The next resistance line is 1.1471 There is support at 1.1266 and 1.1093
by OANDA
Pound slides on Truss resignation falloutThe British pound is showing strong volatility in the wake of Prime Minister's Truss resignation. Truss resigned on Thursday after just 44 days in office, and the pound jumped as much as 1% before paring most of the gains. The reality of the political maelstrom engulfing the UK has set in and GBP/USD has plunged 1.1% today. The currency has touched a low of 1.1100, its lowest level since October 13th. The deep political crisis in the UK has seen two prime ministers resign in just two months and leaves the Conservatives in turmoil. The Conservatives will elect a new leader next week and fortunately for them, they do not need to call an election for two more years. Still, Truss's brief period as prime minister has caused political and financial chaos, and the new leader will have their work cut out to establish some semblance of normality for the country after the circus over the past few weeks. The Bank of England meets on November 3rd and with inflation climbing back into double digits, the Bank has little choice but to continue delivering oversize rates. Policy makers will likely be deliberating between a 0.75% and a full-point hike, which could give the beleaguered pound a much-needed boost. The Federal Reserve has signalled that it plans to remain aggressive, as priority number one remains the fight against soaring inflation. This hawkish position was outlined by Philadelphia Federal Reserve President Patrick Harker on Thursday. Harker was blunt, saying that the Fed's rate hikes had failed to curb inflation and that rates would continue to rise "for a while". He added that rates would be "well above" 4% by the end of the year. Currently, the benchmark is at 3.25%, with the Fed holding its next meeting on November 2nd. The markets have received the message loud and clear, pricing in two more 0.75% increases in November and December. GBP/USD is testing resistance at 1.1254. Above, there is resistance at 1.1399 There is support at 1.1162 and 1.1085
by OANDA
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GBP/USD steadies after rallyGBP/USD has edged lower today, after starting the week with sharp gains. In the North American session, GBP/USD is trading at 1.1334, down 0.18%. The pound continues to show strong volatility as the political saga continues in the UK. Truss finally stopped blaming the markets and "global headwinds" for the decline of the British pound and UK gilts on Monday, saying she was sorry for going too "far and too fast" with her economic plan. Truss has insisted she will continue on as leader, but the restless Conservatives, who have sunk in the polls, could decide to pull the plug on Truss' disastrous leadership. Jeremy Hunt, the new finance minister, wasted no time in abolishing most of the tax cuts contained in the recent mini-budget and told parliament that spending cuts and tax increases were coming, an astounding U-turn. Hunt scaled back the plan to cap energy bills for consumers and that could mean higher inflation. The markets liked what they heard and the pound soared by 1.5% on Monday. Still, the soft economic outlook and the political chaos which has rocked the UK are strong headwinds which will likely weigh on the pound. The UK releases CPI for September on Wednesday, which is expected to edge higher. Headline inflation is projected to hit 10.0%, up from 9.9%, and core CPI is forecast to rise to 6.4%, up from 6.3%. With no sign of inflation peaking, the Bank of England remains under pressure to continue raising interest rates at the November 3rd meeting. Goldman Sachs has downgraded its UK growth outlook, with the economy expected to decline by 1% in 2023, worse than the previous estimate of -0.4%. GBP/USD faces resistance at 1.1373 and 1.1455 There is support at 1.1214 and 1.1085
by OANDA
A traders' week ahead - the hunt to win over the markets UK politics commands the international spotlight from time to time and that time is now. Yet, while we fraternise over Fed policy and how high the Fed could take the fed funds rate into 2023, UK politics and the impact on the UK gilt (bond) market and the GBP is firmly front and centre – the connection between British politics and the capital markets will almost certainly result in increased volatility for the GBP this week. The last few weeks have been one which has not only captivated the world’s financial markets but could be a case study for those bright academics studying at Oxbridge, keen for a future position in the cabinet, on just how mighty the markets can be – and of course, how not to implement new fiscal policies. Truss’s time as PM seems to be slipping by the day, and the weekend press is alive with speculation of a revolt that could soon see 1922 Committee head Graham Brady giving Truss the nod to step down. Naturally, Rishi Sunak is feeling his time to lead is fast approaching and his view that Truss’s tax policies would cause wild gyrations in financial markets have been vindicated and greatly enhanced his brand. Further speculation that Defence minister Ben Wallace may be in the running as a future PM and is also doing the rounds. Truss is moving away from the agenda to spend and talk of “austerity” is becoming ever louder. After last week’s call from the Institute of Fiscal Studies that the UK is in the hole for around £60b if the tax cuts go ahead without massive adjustments to spending is one that has been fully acknowledged and the sums are there for all to see - Truss’s credibility is shot to pieces, and uncertainty is the short-term dynamic that will further rattle UK financial markets. While a change of guard is heavily debated, it won’t happen overnight. The question in the near term is whether Jeremy Hunt can win over the capital markets. While Hunt is well respected within party ranks, the consensus position is that Hunt is facing a true uphill battle and even if the remaining tax cuts are rolled off then the Truss govt will also have to cut spending and that will win her even fewer friends, at a time when her approval rating is at rock bottom. The Sunday papers are already detailing that we’re to hear of further U-turns and a repel of Truss’ ‘mini budget’, with a formal announcement that the planned reduction to the basic rate of income tax will be pushed out by 12 months – more measures should be announced through the week. In a world where we analyse the distribution of outcomes in markets, unless we get a true risk on vibe through markets, lifting equities higher, then it’s hard to see how the GBP rallies this week – the path of least resistance for the GBP is, therefore, lower, with EURGBP longs likely getting a strong showing as traders look to take the USD out of the equation. Hunt seems to have found a friend in BoE gov Andrew Bailey, but the markets may take their pound of flesh and go after something more substantial – they want to feel real credibility. They want a firm government that truly understands the balance between fiscal policy, monetary policy, and government issuance – A Truss/Hunt combo doesn’t quite cut the mustard. With the BoE’s temporary bond-buying program out of action – for now – we watch the UK gilt market reaction, and one suspects that UK 30-year gilts push towards 5% and above. FX traders will get their say before the UK bond market opens and could set a bearish tone – given that GBPUSD closed just off session lows, the heavy tape suggests 1.1000 is more likely than 1.1300, but an open mind is always advantageous when dealing with flows around the interpretation of politics and markets. It’s another big week for markets – the UK bond market will be front and centre – judging the link between politics and markets is always a struggle but where do you see the balance of risk? Aside from the above market consideration, traders will need to navigate: • UK CPI (Wed)- the market expects no change at 9.9% - above 10% and it could get lively in the GBP • EU CPI (Wed) – a big jump expected to 10% - we also get a raft of ECB speakers too and ahead of the ECB meeting (27 Oct) we can see the market pricing a punchy 75bp hike at this meeting • NZ CPI (18 Oct - 08:45 AEDT) – the market expects CPI to fall to 6.5% from 7.3% - could this set a trend of firmly lower inflation reads in G10 FX countries? • China Q3 GDP and industrial production (18 Oct at 1pm) – the market expects Q3 GDP to come in at 3.5% - a solid rise from the Q2 pace of 0.4%. • Aussie employment (Thurs at 11:30 AEDT) – 25k jobs are expected to have been with the unemployment rate unchanged at 3.5% - Hard to see a number that changes the markets view of a 25bp hike in the November RBA meeting. • No tier 1 US data – we do get 9 different Fed speakers and their views could move markets – the data suggests they should all be hawkish. • US earnings – 15% of the S&P500 report – including Netflix, IBM, and Tesla
Short
by Pepperstone
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