Sterling surged, up more than 2% against the dollar after the UK government scrapped almost all tax cuts announced a few weeks ago; GBP/USD recovered most of its losses since the mini-budget announcement, hinting that a follow-up rally could be expected will be limited; from a fundamental standpoint, the outlook for GBP remains challenging in the medium term.
Positive boost, GBP/USD surged
Sterling soared and rose more than 2 percent against the dollar on Monday, boosted by risk appetite and positive news that the British government would withdraw most of its economic plans announced a few weeks ago. The economic plan, announced a few weeks ago, caused severe market turmoil and prompted an emergency quantitative easing action by the Bank of England (BOE).
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Jeremy Hunt, who was appointed as Britain’s new chancellor on Friday, announced on Monday that his predecessor Quatten had been removed.Kwasi Kwarteng“Mini Budget”“Almost all tax cuts included in the program. Hunter is trying to salvage public finances while trying to save fiscal credibility.
The reversal suggests Prime Minister Liz Truss is trying to make a correction to convince investors that Britain will be on a fiscally sustainable path and will avoid a backdrop of high inflation and a large current account deficit. Expansionary fiscal policy finances excessive borrowing.
GBP/USD is expected to be supported by more prudent fiscal policy, but the pair has recovered since“Mini Budget“Most of the losses have been post-launch, so the upside potential for GBP/USD is expected to be limited in the aftermath. The launch of the “mini-budget” once triggered a sharp sell-off in British gilts.
In the medium term, the pound is likely to continue to struggle due to external imbalances and weak internal fundamentals. Focusing on the economy, the UK is likely to enter a deep recession in 2023. It is also expected to be accompanied by continued price pressure, which could hurt UK assets and lead to an increase in capital outflows.
A divergence in monetary policy from the Bank of England and the Federal Reserve could also pose a bearish risk for the pound. While the Bank of England has been steadily raising rates, it has never been as aggressive as the Fed. The Bank of England has raised rates less aggressively than expected in six of its past eight rate decisions, a sign that British policymakers are not comfortable with an overly hawkish stance amid growing recession risks.
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GBP/USD trend technical analysis
The week started with strong upward momentum, with GBP/USD back above the 1.1400 mark and briefly soaring to its highest level since October 5. If the GBP/USD bulls continue to hold the momentum, the next resistance worth watching is in the range of 1.1460-1.1500; if it breaks, it will further focus on 1.1600 or even around 1.1740. Conversely, if the rally on Monday begins to subside, the initial support will focus on the range of 1.1380/1.1355. If it breaks, it will further focus on 1.1240 and then 1.1150. (Translated by Lisa by Diego Cloman)
GBP/USD technical chart
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