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Investors calmed down as Rishi Sunak took office as the new British PM. However, the UK economy is already in a recession. How will it affect the GBPUSD? Let’s discuss it and make a trading plan.
Weekly fundamental forecast for GBPUSD
Honeymoons are wonderful, but they sometimes end with a divorce. Liz Truss had to resign after her failed mini budget plan shocked markets. Gone are the days when nobody worried about financial stability due to low borrowing costs. Nowadays, rate hikes turn a tax cut into a factor that frightens investors. They need to be reassured, and that’s what Rishi Sunak did. The new premier had a favorable impact on the GBPUSD. His honeymoon is just beginning.
The former Chancellor of the Exchequer promised to stabilize the economy that had faced a deep crisis. His comeback makes things look better for the pound. The degree of political uncertainty has reduced, the market’s confidence in fiscal policy recovered, and a part of risk premium has been cut.
As a result, the cost of insuring UK debt against default dropped to its lowest since Liz Truss’ fiscal package was announced, and so did UK bond yields. The GBPUSD pair soared to 6-week highs. It seems that Rishi Sunak and not Liz Truss won the election.
At the same time, it’s too early to rejoice. The fall of business activity to 47.1 in October, the lowest level in the past 21 months and the third consecutive reading under the critical level of 50, indicated the UK economy is in a recession.
UK Business activity
Source: Financial Times.
At the same time, the Bank of England has to raise the REPO rate to counter the record-high inflation — the highest in a few decades. That worsens the recession. The US economy, not burdened with Brexit, an energy crisis, or political cataclysms, looks better, which pushes the GBPUSD down. However, the USD is also under pressure as the Fed’s monetary restriction seems to be slowing down.
Investors believe the US economic activity and inflation have reached their highs. As a result, rumor has it that the federal funds rate will also rise to its peak soon, just like the USD index. Considering inflated speculative longs in the USD, any unpleasant news results in huge sales.
The markets have already burnt their fingers a few times this year, so they cautiously treat the idea of slower monetary restriction and fear the FOMC’s meeting in November. If the Fed remains determined to combat inflation and does not give any clues about a 50-point federal funds rate hike in December, instead of a 75-point hike, the USD will keep its royal status in Forex.
Weekly trading plan for GBPUSD
The pound will play second fiddle to the greenback up to the Fed’s November meeting. However, consider selling the GBPUSD in the direction of 1.14 and 1.134 if the pair fails to hold above 1.157.
Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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