British Pound on Edge as BoE Does Little to Allay Concerns. Where to for GBP/USD?

By | September 27, 2022
  • British Pound is still under pressure due to divergence in fiscal and monetary policies. The Bank of England (BoE), in a statement, thwarted market speculation of any form of near-term intervention.

     

    Sterling has been in the red since Friday when Kwasi Kwarteng, Chancellor of Exchequer, announced that the UK government would be implementing tax cuts and deregulation.

     

    Over the weekend, he made additional comments and reiterated that the plans would be funded with debt. The UK’s debt to GDP ratio is now close to 100%. The OECD says that the UK is one of the most deregulated countries in the globe.

     

    Markets are concerned about the UK government’s ability to finance their debt without incurring a substantial risk premium. The premium can be paid by either a higher interest expense or a currency devaluation, or both.

     

    This is a complete opposite of what the BoE is trying achieve by tightening monetary policies to limit sky-high inflation. This stage of the cycle also sees a drastic change in fiscal policy compared to other developed markets, where debt accumulation due to pandemics is common.

     

    Yesterday’s statement by Andrew Bailey, Governor of the BoE, cooled speculation about a change in interest rate or FX intervention. They stated that the Bank was closely monitoring financial market developments due to the substantial repricing of financial assets.

    This language is very similar to the one used by Bank of Japan (BoJ), when USD/JPY surpassed 145. They intervened physically in the FX market a week later when it was above145.

     

    The UK rates were already on the rise prior to Friday’s fireworks and this event sparked an additional boost in yields.

    Swaps market prices in a close to a 150-basis points hike by the BoE at its next meeting. The whole Gilt yield curve is now around 100 basis points higher that it was last week.

    GBP/ USD could be on a bumpy path if the government continues to pursue its policies.

    GBP/USD TECHNICAL ALYSIS

    GBP/USD is currently in uncharted territory. It has never traded so low since 1972, when the currency was first floated.

    Not surprisingly bearish momentum signals are strong, and could indicate that further weakness is possible.

    To form a bearish triple moving average, (TMA), the price must be below the short-term simple moving average . The latter must be below both the medium term SMA (SMA) and the medium term SMA (SMA) . SMAs must also have a negative gradient.

     

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