The British Pound Hits Resistance Zone After Astounding U-turns

Written on 18/10/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Amid the manic political theatre going on right now in the UK, markets have been busy rallying after the new UK Chancellor ripped up the government’s controversial tax-cutting plans. The once rarely watched, opaque gilt government bond market has become the star of the show, hopefully only for 15 minutes, as many are keen to see it return to the “back benches” where it normally resides.

The UK government’s interest rate borrowing gauge has fallen as confidence and stability return to the country’s assets. But there is a long, grim road ahead with depressed growth accompanied by elevated price pressures.

Roller Coaster Ride of UK Markets

The history books will note the last few months in UK economic history have seen the country referred to as an “emerging market”. Policial instability, soaring inflation, trade troubles and an energy crisis have stigmatised the once rock-steady and admired economy. But with the Bank of England warning in the middle of the summer that the economy would enter its longest recession since the global financial crisis in the final quarter, GDP will be lower while inflation stays high.

A currency crisis was missing from that list, but the last few weeks have ticked that box. Sterling crashed to an all-time low during Tokyo hours and has now bounced over 10% from those dark days. Moves of a few percentage points intraday have been common, with extreme volatility which is highly uncommon in a G7 currency. Many politicians and UK residents will be hoping the “emerging market” moniker stays in the history books going forward.

UK CPI in Focus

If instability really is a thing of the past, gaining Parliament’s approval for extra tax hikes or spending cuts will prove interesting. Then focus may turn back to economic data and we get the latest CPI figures released on Wednesday. Whilst fiscal measures and policies have been under the spotlight recently, it is rampant price pressures which have really lit the volatility bonfire and poured gas on the interest rate markets.

Expectations are for annual CPI to climb to 10.1% from 9.9% with the core metric set to rise to 6.4% from 6.3%. Economists forecast upside pressure from food prices battling with falling petrol prices, while going forward, inflation is expected to remain in double digits in the next few months.

This key piece of data will inform the next Bank of England rate decision, with money markets pricing in roughly a two-in-three chance of a 75bp rate hike. There are still around 175bps of increases by the end of the year. This crucial meeting is what may impact sterling the most if the currency can once again return to its name. For cable, the pandemic low at 1.1409 is a major resistance level. The 50-day simple moving average looms above here at 1.1500, while trendline resistance from the August high sits around 1.1357.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.