GBP/USD OUTLOOK:
- The British pound surges, rising more than 2% against the U.S. dollar after the UK government reverses nearly all tax cut plans announced a few weeks ago
- GBP/USD has recovered most of the losses suffered since the mini-budget was released, suggesting that upside may be limited going forward
- From a fundamental standpoint, sterling maintains a challenging outlook over the medium term
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The British pound soared on Monday, rallying more than 2% against the U.S. dollar, bolstered by risk-on mood and news that the UK government will abandon most of the economic plans put forward a few weeks ago that sent markets into turmoil and prompted the central bank to undertake emergency quantitative easing.
Jeremy Hunt, who was appointed as the new Chancellor of the Exchequer last Friday, announced today that he would reverse virtually all of the tax cuts included in the “mini-budget” rolled out by his predecessor Kwasi Kwarteng as he tries to salvage fiscal credibility and straighten out public finances.
The reversal suggests Prime Minister Liz Truss may be trying to make amends to convince investors that the country will be on a fiscally sustainable path, avoiding borrowing excessively to fund expansionary policies at time of high inflation and a sizeable current account deficit.
A more prudent fiscal policy should be supportive of the GBP/USD, but the pair has already recouped most of the losses incurred since the unveiling of the mini budget that sparked a major gilts selloff, so its upside potential may be limited going forward.
Over the medium term, sterling is likely to continue to struggle due to external imbalances and weak domestic fundamentals. Focusing on the economy, the country is likely to enter severe downturn in 2023, which coupled with persistent price pressures, should act to undermine UK assets, increasing capital outflows from domestic markets.
The divergence in monetary policy between the Bank of England and the Fed should also be a headwind for cable. While the BoE has been steadily raising rates, it has not been as aggressive as the FOMC, with the institution lifting borrowing costs less than expected at six of its last eight meetings, a sign that policymakers are not comfortable with an overly hawkish stance amid mounting recession risks.
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GBP/USD TECHNICAL ANALYSIS
GBP/USD reclaimed the 1.1400 handle at the start of the week, rising to its best level since October 5th on strong bullish momentum. If buyers retain control of the market, the next resistance to consider appears at 1.1460/1.1500. On further strength, the focus shifts to 1.1600, followed by 1.1740. On the flip side, if Monday’s rally starts to fade, initial support is located at 1.1380/1.1355. If this floor is breached, we could see a move towards 1.1240 and then 1.1150.
GBP/USD TECHNICAL CHART
GBP/USD Chart Prepared Using TradingView
| Change in | Longs | Shorts | OI |
| Daily | -3% | 20% | 7% |
| Weekly | -9% | 8% | -2% |
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—Written by Diego Colman, Market Strategist for DailyFX
