New UK administration has brought more stability to the local bond and currency market, but economic slowdown and rising inflation pose greater risks. FOMC and BoE are expected to hike 75-bp this week. GBP/USD outlook likely to remain gloomy.
The reversal of the Truss tax cuts, which initially triggered volatility in the UK Gilts market and subsequently led to GBP depreciation, has temporarily given investors a sense of relief. But while the new administration is considering raising taxes in an effort to plug the fiscal deficit, markets remain cautious as the UK economy is already showing clear signs of a slowing at a time when price pressures continue to grow.
For context, the latest GDP figure showed that the UK economy contracted in the month of August, while the inflation reading for September returned to the 40-year high previously hit in July, also exceeding expectations for a +10% y/y increase. The largest contributions to price pressures continued to come from food and energy, with these items showing no signs of easing in the near term.
Over the weekend, it was reported that Russia withdrew from the grain deal negotiated by the United Nations in July, which would now put further pressure on food prices, as Ukraine and Russia together account for nearly one-third of global wheat exports.
strength against the pound. However, if the BOE surprises with a 100bp-rate hike, the GBP could appreciate in the short term.From a technical standpoint, during the past few days GBP/USD has been consolidating as investors await major risk events during the week. However, the psychological level of 1.1500 has been breached today and a low of 1.1460 has been recorded at the time of writing as risk appetite receded. On the daily chart, first resistance is seen around 1.1645.
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