Having seen Sterling fall over 20% against the USD since April, the Pound started the week in a difficult position with rising political uncertainty surrounding Liz Truss’s fledgling government and question marks surrounding the Bank of England’s leadership. It is unsurprising that the GBP had struggled to make any real notable gains against both the USD and the EUR in the early part of the week.
The BOE and the new government are now seemingly at a standoff regarding how best to address the difficult economic situation facing the UK currently. Perhaps most worrying is that their biggest issues seemingly have no end in sight: their respective policies contrasting each other in such a way the BOE is forced to react nearly every other day (seen this week in the form of long-dated gilt yields) in order to fight the Government’s mini-budget and the inflationary pressures these policies would cause should they come to fruition. Add this to a backdrop of poor GDP figures that saw the UK economy contract by 0.3% m/m (due in part to the extra bank holiday for the Queen’s funeral), coupled with strong CPI inflation data coming out the US and hawkish comments from members of the Federal Reserve which has meant that Sterling has struggled to pass the 1.11 mark against the USD.
Rumours in the early parts of yesterday afternoon that Liz Truss is prepared to U-turn on her tax cutting initiative saw the Pound recover over 2% against both EUR and the USD in the later parts of yesterday and into this morning. All eyes now will be on Andrew Bailey’s speech tomorrow following the end of the BOE’s purchasing of long-dated gilt yields; with any comments on how the BOE may act at the next interest rate decision, scheduled for November 3rd, likely to be of most interest to traders with current predictions sitting at a full basis point hike.
The recovery seen in the last couple days is likely to be short lived however: Credit Suisse are predicting Cable to test 1.035 by the end of the year and Nomura are predicting -2% GDP in the UK by the end of the Q1 next year. It is becoming increasingly apparent that without dramatic change or intervention from the Bank, the outlook in the UK remains bleak.
