Trade Of The Week: Sterling Influenced By Political Drama

The last few weeks have been wild for sterling as political chaos haunted investor attraction towards the currency. A toxic combination of uncertainty, confusion, and repeated U-turns on the government’s mini-budget coupled with central bank intervention placed sterling on a chaotic rollercoaster ride! After collapsing to an all-time low back in late September, prices have rebounded but remain in a downtrend.

Before we unpack what to expect from the pound this week, it is worth keeping in mind that the currency is not only dealing with political drama but mounting concerns over economic growth. Given how inflation continues to squeeze households and fuel speculation around the BoE launching a monetary policy bazooka, this certainly does not bode well for sterling. While a jumbo-sized rate hike could tame the inflation beast, it may come at the cost of economic growth.

The low down…

Political developments in the UK have felt like a blockbuster TV series over the past couple of days.

After making repeated U-turns on the mini-budget, British Prime Minister Liz Truss made another drastic U-turn last Friday by scrapping plans to freeze corporation tax in 2023. This decision was taken just hours after sacking Kwasi Kwarteng as Chancellor of the Exchequer and replacing him with Jeremy Hunt. Despite these dramatic steps and a short press conference, markets were unamused with some even raising questions over her future as prime minister.

Interestingly, the UK markets kicked off the new week on a positive note after the Treasury released an unexpected statement at 6 am UK time. The treasury notified markets that it would “bring forward measures from the medium-term fiscal plan”, to cool nerves, reduce uncertainty and provide fresh clarity. Sterling has rallied on growing expectations that more of Prime Minister Liz Truss’s tax cuts would be reversed with the GBPUSD trading around 1.1300 as of writing.

The week ahead…

The new Chancellor of the Exchequer Jeremy Hunt hijacked the spotlight on Monday after delivering an emergency statement that practically reversed almost all of Liz Truss’s mini-budget tax cuts. Markets offered a calm reaction to this major development with the pound stabilizing as investors evaluated how these changes may influence the UK economy and consumers. Although Hunt stated that the tax changes would raise an extra £32 billion more a year, this could hit households who are already dealing with an income squeeze. One key thing that stood out was the government potentially cutting support on energy bills after April 2023. Liz Truss initially promised to support UK households by capping the price of energy bills at no more than £2500 for two years, but this will now last until April next year.

Hunt is scheduled to make another speech on Monday afternoon to provide further clarity on the unprecedented fiscal U-turn. Whether this will be enough to conclude this saga and fully calm markets from the recent chaos, time will tell.

In other news, the UK publishes its latest inflation figures mid-week which could trigger additional volatility. Inflation is expected to remain unchanged at 9.9% YoY. A hot CPI report may fan expectations around the BoE moving ahead with a supersized rate hike in November. While such a hike could boost Sterling, gains are likely to be limited by recession fears. If inflation cools in September, this could allow the BoE to approach inflation less aggressively. Another important report to keep an eye on will be the retail sales figures on Friday.

Pound breakout on the horizon?

Talking technicals, the GBPUSD remains in a wide range on the daily charts. Resistance can be found at 1.1500 and support around 1.0925. A break back above 1.1300 could trigger an incline towards 1.1500. Should prices struggle to push higher, bears are likely to target 1.0925 and 1.0850, respectively.