Week Ahead: What’s Next For British Pound?

*Update: A few hours after the report was written, Kwasi Kwarteng was sacked the chancellor of the Exchequer*

Sterling has been explosively thanks to the ongoing drama revolving around the government’s mini-budget and Bank of England (BoE).

After plunging to an all-time low back in late September, bulls have fought valiantly – pushing prices back to levels before the chaos unfolded. However, the currency is certainly not out of the woods yet. With uncertainty and confusion mounting over the Bank of England’s next move and talks of more fiscal policy U-turns on the mini-budget, this could translate to fresh pound volatility in the week ahead.

Before we discuss the technical and fundamental forces that may influence sterling, here are the scheduled economic data releases/events in the coming week:

Monday, 17 October

• NGN: Nigeria Inflation
• USD: Empire manufacturing
• EUR: ECB Vice President Luis de Guindos, ECB Chief Economist Philip Lane speech

Tuesday, 18 October

• CNH: China 3Q GDP, Retail sales, industrial production
• AUD: Reserve Bank of Australia minutes  
• EUR: Germany ZEW survey expectations
• USD: Industrial production, NAHB housing market index

Wednesday, 19 October

• EUR: Euro area inflation
• GBP: UK inflation
• USD: Chicago Fed President Charles Evan, Minneapolis Fed President Neel Kashkari, St. Louis Fed President James Bullard speech

Thursday, 20 October

• CNH: China loan prime rates
• EUR: Germany PPI
• GBP: Gfk consumer confidence
• USD: US existing home sales, initial jobless claims  

Friday, 21 October

• EUR: Euro area consumer confidence
• GBP: UK retail sales

The BoE and new Conservative government are not seeing eye-to-eye, with less than 24 hours until the central bank ends its emergency bond-buying program. Reports of Chancellor of the Exchequer Kwarteng leaving the IMF meetings prematurely to address the current crisis are likely to leave market players on edge. Given how Liz Truss is speculated to remove further elements of the mini-budget over the weekend, Monday’s market open for sterling could shock investors. Ultimately, the current developments expose the UK economy to downside risks at a time when rising inflation is squeezing UK households.

Speaking of inflation, the UK releases inflation figures for September mid-week. According to Bloomberg, inflation is expected to remain unchanged at 9.9% YoY. A report that meets or exceeds expectations may fuel speculation around the BoE moving ahead with a 100-basis point supersized hike. While such a move could inject the pound with short-term confidence, gains are likely to be capped by recession fears. Alternatively, signs of inflationary pressure cooling could reduce BoE rate hike bets – weakening the pound. Other key economic reports to keep an eye on range from the Gfk consumer confidence to retail sales.

Looking at the technical picture, the GBPUSD could swing both ways in the week ahead. If prices can keep above 1.13 the next key level of interest can be found at 1.15 which is just below the 50-day Simple Moving Average. Beyond this point, prices could venture towards the previous lower high around 1.173. Alternatively, sustained weakness under 1.13 could trigger a selloff towards 1.0925 and lower.

Redirecting our attention away from sterling, it may be worth keeping a close eye on stock markets – especially with earnings in full swing. It’s been a rough year for equity markets with the S&P500 down over 22% year-to-date. Investors are likely to closely scrutinize the upcoming earnings for clues on companies’ growth prospects in high interest and strong dollar environment. On the data front, there will be some key economic reports from major economies like China, the United States, and Europe to name a few.

China’s third quarter GDP report could be a market shaker on Tuesday depending on how investors react to the print. Consensus is predicting 3.5% but Bloomberg Economics is predicting 2.7% year on year. The week will also be jam-packed with numerous speeches from various financial heavyweights. With so much going on, it may be wise to strap up and be prepared for another eventful week ahead for financial markets.

British Pound BoE Rates inflation GBPUSD China