FX Daily: GBP got pounded, markets have least trust in UK’s policy path

GBP not out of the woods, DXY could consolidate
Group Research, Philip Wee27 Sep 2022
    Photo credit: Unsplash Photo

    GBP overtook JPY as the weakest DXY currency this year. GBP depreciated 21% YTD vs 20.5% in the JPY. On Monday, GBP fell 1.6% to 1.0689, not before plunging 4.7% to a new lifetime low of 1.0350 at the start of the Asian trading session. The previous all-time low was 1.0520 in February 1985. During the European session, GBP rebounded 1.0931 on expectations for the Bank of England to jack up rates to stabilize the currency. However, the recovery subsided after the BOE issued a statement that it would only act after thoroughly assessing the impact of fiscal plans and the GBP’s weakness on inflation at the next monetary policy committee meeting on 3 November. GBP is not out of the woods yet. Another rise in Gilt yields and option volatility might send it lower again. 

    The collapse of the GBP and the spike in Gilt yields reflected the market’s unwillingness to endorse the tax cut plan announced in the mini-budget last week. The National Institute of Economic and Social Research (NIESR) estimated the Truss government’s borrowing-to-spend plan would widen the budget deficit to 8% of GDP this financial year. Bloomberg consensus projects a current account deficit of 5.6% of GDP in 2022, wider than the 5.3% in 2016, the year of the Brexit Referendum. Last Thursday, the BOE raised rates by 50 bps, clear about its priority to rein in elevated inflation even as it predicted the UK economy entering a technical recession in 3Q22. The Office for National Statistics is scheduled to release the 3Q22 GDP report on 30 September. Former US Treasury Secretary Lawrence Summers warned that the UK was behaving a bit like an emerging market, pursuing the worst macroeconomic policies of any major country in a long time that threaten to sink GBP below parity against the USD.

    In the overnight markets, the Dow, S&P 500 and Nasdaq Composite fell 1.1%, 1.0% and 0.6% respectively. Atlanta Fed President warned that UK’s fiscal path could heighten volatility in global financial markets and hurt the global economy. Boston Fed President Susan Collins warned that external shocks like a significant economic or geopolitical event could push the US economy into recession. Today, the US Conference Board’s consumer confidence index might disappoint. Consensus expects headline confidence to improve to 104.5 in September from 103.2 in August. However, nonfarm payrolls did slow amidst a rise in the unemployment rate earlier this month. Today’s new home sales might also dip below 500k (consensus) in August. The Fed’s aggressive stance to control inflation at the expense of growth and jobs should turn the American consumer cautious too. Hence, pay close attention to the present situation index for signs of weakness. After two days of strong appreciation, DXY might consolidate inside its new 110-115 range.

    Quote of the day
    “Whoever is careless with truth in small matters cannot be trusted with important matters.”
          Albert Einstein

    27 September in history
    The Republic of China was recognized by the United States in 1928.

    Philip Wee

    Senior FX Strategist - G3 & Asia


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