Oct 3, 2022
VOT Research Desk
Key Insights and Analysis
GBP/USD attempts to recover recent losses, but fundamentals remain weak Major event risk: Pound Sterling rises on UK tax cut reversal Conference of the Tory Party, data on the US PMI, and non-farm payrolls (NFP)
This morning, a remarkable reversal of the planned tax cuts for the UK’s highest earners was made public by the government led by Liz Truss. The tax cuts were just one part of a completely unconventional fiscal policy that the chancellor announced on Friday, September 23, that led to a significant loss of trust in UK assets and the current government, as the pound plummeted and UK gilts sold off at an alarming rate.
In light of recent polls indicating a growing preference for Labor leadership, the optics surrounding tax cuts for the wealthy while refusing to commit to increasing welfare benefits in line with inflation have played right into the hands of the Labor party. The decision to reverse the tax cuts, which was probably made under pressure from conservatives, led to a slight rise in the pound, which is helping the local currency make up for lost ground.
The daily chart depicts what appears to be indecisiveness in relation to levels that were observed shortly after Finance Minister Kwarteng presented the mini-budget on September 23, when prices plunged. However, since there is still plenty of time in the trading session for subsequent price movement, the Doji candle would need to remain in place until the daily close.
Since the massive fall to 1.0340, price action has come a long way. Cable could move toward today’s high of 1.1282 and even the descending trend line that connects multi-month highs if additional policy reform revelations make their way to the newswire.
However, if Liz Truss remains steadfast on other aspects of the recent fiscal proposals, a move lower in sterling cannot be ruled out because the market is currently extremely responsive to news flow. Support in the near future appears to be at 1.1110, followed by the very distant 1.0547.
The revelations that come out of the Tory party conference will be front and center, with Kwarteng speaking this morning and Liz Truss speaking on Wednesday. Additionally, on Wednesday, we will receive US services PMI data for September, which is expected to show a slight decline but still remain in expansionary territory (above 50).We will receive US non-farm payroll (NFP) data on Friday, in which an additional 250 thousand jobs are expected to be created and the unemployment rate is assumed to remain at 3.7%.GBP will suffer in the medium term if the uptrend in US data continues. This leaves more room for the Fed to tighten aggressively.
