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Sterling recovery slows as PM apologizes for ‘mistakes’

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Pound Sterling (GBP) news and analysis.

  • Prime Minister Truss apologizes for ‘mistakes’ as new finance minister reverses former mini budget items
  • The cable network is off recent lows, but political uncertainty is limiting upside potential. Resistance is visible on the daily chart
  • Longer-dated UK government bond yields fall but remain high amid rising volatility

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UK PM Truss apologizes for ‘mistakes’

New British Prime Minister Liz Truss apologized yesterday after revelations of a mini-budget announcement sent shockwaves through financial markets, prompting Bank of England (BoE) to intervene to prevent systemic risk emanating from large pension funds as bond yields accelerated.

New Finance Minister Jeremy Hunt yesterday reversed virtually everything that was originally proposed on September 23 by ousted Finance Minister Kwasi Kwarteng. In particular, a major energy price cap scheme – a major target of the Truss election campaign – was cut back to the end of April 2023 instead of October 2024, giving it a political setback. 5 MPs have already publicly called for her removal, which may prove difficult given that a no-confidence motion cannot be passed within the first 12 months. However, if a large majority insists that she vacate her position, all members can vote to change the rules to remove her early.

The market reaction was more or less as expected. Fiscal reassurance from Jeremy Hunt sent cable higher to 1.1410 resistance. On the daily chart, this level appears to be one where buyers ran out of momentum as a series of lower moves followed the creation of the upper level wicks.

However, longer-term bearishness remains for cable as the Fed continues to hike without the constraints faced by the Bank of England due to recent pension/bond market difficulties. In addition, during periods of financial difficulty, disruption or systemic threats US dollar is the preferred currency to hold in the event of a liquidity strain, which is likely to find support only in the near to medium term.

GBP/USD Daily schedule

Source: TradingView, prepared Richard Snow

The 4-hour chart shows a cable recovery, but also highlights the limitation of the upside momentum in the 1.1410/1.1461 area. GBP/USD is unlikely to reveal directional upside until there is more clarity on the political front, as markets remain highly reactive and volatility remains elevated, as shown by the average of the true range in the daily chart above.

GBP/USD 4 hour chart

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Source: TradingView, prepared Richard Snow

While cable stocks are recovering from lows, the bond market is recovering at a different pace: Short-term yields are down sharply, but 20- and 30-year yields remain higher than before the mini-budget. The Bank of England had intended to continue selling bonds next week, but pulled back given the volatility and volatility of the bond market. Unlike in the US, rising yields have not led to a stronger pound as it only exacerbates economic hardship and lowers the cost of living.

UK government bond yields (gilt) (2, 10, 20, 30 years)

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Source: TradingView, prepared Richard Snow

Tomorrow, Great Britain inflation the data is likely to underline the need for the Bank of England to raise rates again on November 3. Markets have priced in 94 basis points for the tightening amount, which could create a pond for bearish repricing if the Bank opts for a more conservative 75 basis point hike given the recent volatility.

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— Written by Richard Snow for DailyFX.com

Connect with Richard and follow him on Twitter: @RichardSnowFX

https://www.dailyfx.com/news/gbp-price-outlook-sterling-s-recovery-falters-as-pm-apologizes-for-mistakes-20221018.html

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