The Sterling collapsed last week after the Fed and BOE policy meetings. The GBP/USD rate fell at multi-decade lows against the dollar, closing near the 1.108 level on Friday. If the GBP/USD rate goes up, it may encounter resistance near the 1.173 level and higher up near 1.190.
The Sterling retreated even further against the dollar on Friday, after the announcement of the new government’s first ‘mini-budget’. The Sterling has already dropped to a 37-year low mid-week, following Putin’s threats and the Fed’s aggressively hawkish stance compared to the BOE’s more moderate policy. On Friday, the new British Chancellor announced a preliminary budget including substantial tax cuts and energy subsidies. Chancellor Kwasi Kwarteng’s ‘mini budget’ aims to tackle soaring UK inflation and poor economic outlook. The announcement of the budget was met with skepticism by markets and the Sterling tumbled.
A climate of political uncertainty has been putting pressure on the GBP over the past few months, especially after former PM Boris Johnson’s resignation in July. Liz Truss became UK’s next Prime Minister, bringing a measure of stability. Truss has announced an ambitious plan to prop up energy in the UK and reduce the average cost of energy for households, by funneling billions to the sector. announce details of the energy plan on Wednesday, stating that British households will be burdened with high energy bills as the price of independence from Russian energy imports.
UK Flash Services PMI released last week fell below expectations, dropping to 49.2 from 50.9 the previous month. Manufacturing PMI data on the other hand exceeded expectations, rising to 48.5 from 47.3 the previous month, indicating that the UM manufacturing sector expanded.
UK economic outlook remains poor, with high inflation and rising recession concerns, although annual inflation in August dropped to 9.9% from 10.1% in July. The BOE has warned that recession is expected to hit the UK in the fourth quarter of this year, and is forecasted to last for five quarters, until the end of 2024 with GDP falling to 2.1%.
The Bank of England raised its interest rate by 50 bps on Thursday, bringing the total interest rate to 2.25%. Markets were expecting a steeper rate hike, with odds favoring a 75-bp raise. The BOE has adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy. In contrast, the Fed is ramping up efforts to combat US inflation by raising its interest rate by 75 basis points on Wednesday. The Fed is expected to continue hiking its interest rates in the following months, as signaled by Fed Chair Jerome Powell on Wednesday.
This week, MPC members’ speeches throughout the week are expected to affect the Sterling in the wake of last week’s BOE policy meeting. Market participants will scan these speeches to gain insight into the BOE’s future stance.
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