Sep 27, 2022 7:00 AM +05:00
VOT Research Desk
Key Insights
The Bank of England has indicated that it will not change its fiscal policy, but it is monitoring the situation. The strengthening of the US dollar compelled the BoJ to take action. As a result, the British pound has been battered. Is the BoE going to be coerced?
Due to divergence in monetary and fiscal policy, the British pound is still under pressure. The Bank of England (BoE) issued a statement that stopped market speculation of some kind of immediate intervention, which did not help the situation.
Since Chancellor of the Exchequer Kwasi Kwarteng announced the UK government’s plans for tax cuts and deregulation on Friday, sterling has been under pressure.
Over the weekend, he made additional remarks in which he reiterated the plan’s debt financing. The ratio of UK debt to GDP is already close to 100 percent. The OECD says that the UK is already one of the world’s most deregulated countries.
The possibility that the UK government will be able to pay off its debt without incurring a significant risk premium is a source of concern for the markets following the announcement of these tax cuts. Either a currency devaluation or a higher interest rate expense can be used to cover this premium.
The BoE is attempting to control sky-high inflation by tightening monetary policy, but this loosening of fiscal policy is swimming in the opposite direction. In addition, the loosening of fiscal policy at this point in the cycle stands in sharp contrast to other developed markets, where the repayment of pandemic debt is a common occurrence.
They dispelled rumors of a change in interest rates or FX intervention in a statement issued yesterday by BoE Governor Andrew Bailey. In light of the significant re-pricing of financial assets, they stated, “The Bank is monitoring developments in financial markets very closely.”
The Bank of Japan (BoJ) used language similar to this when USD/JPY approached 145.A week later, when the FX market was above 145, they physically intervened.
UK rates had already been rising prior to the fireworks on Friday, and these occurrences sparked yet another rise in yields.
At their next meeting, the BoE is expected to raise rates by close to 150 basis points, according to the swaps market. The Gilt yield curve as a whole is approximately one hundred basis points higher than it was at this point last week.
GBP/USD may encounter difficulties in the future if the government continues to implement its policies.
Analytics of GBP/USD
GBP/USD has never traded this low since the currency was first introduced in 1972.
It should come as no surprise that strong bearish momentum signals may suggest further weakness.
Price must be below the short-term simple moving average (SMA), the medium-term SMA must be below the long-term SMA, and so on for a bearish triple moving average (TMA) formation to occur. Additionally, all SMAs must have a negative gradient.
The requirements for a TMA in GBP/USD have been met by looking at any combination of SMAs.
Breakpoints at 1.1405 and 1.1414 might present resistance.
