GBP Finds Equilibrium – For Now

Following the heavy volatility we saw in GBP on Friday and Monday, price action has since stabilised. In GBPUSD in particular, price plunged almost 5% on Monday before reversing around 70% of those losses. The market has since been underpinned by support at the 1.0646 level though looks vulnerable to further losses. In terms of deciphering the bounce off the lows, the move looks be mainly linked to large players simply looking to buy GBP at record lows. There have been reports of many sizeable players looking to secure GBP purchases given how far below its 5-year average it has fallen, and therefore not particularly indicative of the view that the currency is likely to recover near-term.

Adverse Market Reaction To Mini-Budget

The driver behind the fall itself was the market reaction to the mini-budget announced by the UK government on Friday. Chancellor Kwasi Kwarteng announced the removal of the highest 45% tax bracket in the UK, a reduction in stamp duty and a 1% reduction in income tax. Additionally, Kwarteng announced that the planned 1.25% increase in National Insurance tax will be scrapped.

Looking at corporates then, Kwarteng removed the cap on bankers’ bonuses, put in place after the GFC, and has scrapped next year’s planned increase in corporation tax from 19% to 25%. In all, the new tax cuts would, according to the budget, be funded by fresh borrowing of £45 billion by the UK government.

With GBP seeing its third worst day behind the COVID outbreak and Brexit referendum results, the market’s verdict on the “pro-growth” measures are quite clear. Critics have called the moves a disaster for the UK economy stating that the measures will simply add to the inflationary spiral currently gripping the UK, forcing the BOE to tighten more aggressively.

BOE In Focus

Indeed, with GBP sinking to record lows against USD, speculation of an emergency BOE rate-hike was rife on Monday. However, the BOE issued a statement saying that while it was monitoring the situation and did indeed have tools, and the willingness to use them, at its disposal, it would wait until the next scheduled BOE meeting in November to take action.

IMF Criticises UK Tax-Cuts

The IMF this week joined those criticising the UK government. The fund labelled the tax cuts excessive and urged a review of the measures, specifically those aimed at helping the highest earners in the UK. The IMF warned that the untargeted tax cuts would likely lead to greater inequality in the UK and would undermine monetary policy.

In response to the situation, new PM Truss announced that the government would issue a statement on November 23rd adding further details to the budget and setting out a full fiscal plan. In the meantime, the new chancellor is undertaking meetings with investment banks aimed at gathering information ahead of that date.

Technical Views

GBPUSD

The market is trading almost a thousand pips below where it was last week. The break below the 1.1474 level is a major bearish development and while below there, the focus is on a further push lower. However, while the prior 1985 lows at 1.0539 hold, we are likely to see a period of range-bound activity while the market awaits fresh drivers.