Markets React Negatively to UK Government Mini-Budget

The British Pound has seen it’s most volatile trading period since the start of the pandemic with GBPUSD crashing almost 10% lower, falling to its lowest level on record. We’ve seen similar scale moves across the board with EURGBP and GBPJPY both seeing wild moves also, the latter selling off by more than 1000 pips from Friday’s opening price.

The driver behind the move is the market reaction to the new mini-budget announced by the UK government on Friday. The budget detailed massive tax-cuts and large increases in government spending, to be funded by huge increases in government borrowing. The plan, which has been billed by the government as pro-growth, has been widely criticised as likely to exacerbate the inflationary spiral currently gripping the UK.

With the BOE last week confirming that the UK is likely already in recession, this further drop in GBP will no doubt put further pressure on the BOE near-term. Notably, we’ve seen heavy buying off the lows in this current move with GBPUSD recovering almost 50% of the decline so far today. The key now will be whether these lows mark a blow-off in GBP short positioning, allowing for a fuller recovery, or are simply a short-term bounce before the Pound rolls over again.

Technical Views

GBPUSD

Easier viewed on the monthly chart at this point, we can see that having pierced below the 1985 lows GBPUSD is now back above that level. While above 1.0539, there is the chance we see a double bottom forming, putting focus on a move back up towards 1.1474 and 1.2195 above. However, with MACD and RSI both bearish, downside risks remain elevated here.