Britain's recession ferments, new prime minister needs to turn the tide

The GBP/USD rebounded in shock this week, mainly supported by the fall of the U.S. dollar. Political instability and economic recession worries put pressure on the GBP. The new British Prime Minister Sunak took office, the Bank of England's current round of interest rate hike cycle peak may be lower than expected, which may limit the appreciation potential of the pound. The recession in the UK will be deeper and earlier than in the Eurozone.

The U.S. Commodity Futures Trading Commission CFTC foreign exchange business position report shows that as of the week of 2022-10-25 (hands), the long position of GBP decreased by 5239 lots to 189146 hand positions; GBP/USD hit the 1.1600 mark, the latest report was 1.1600, and the daily chart rose 0.37%.

The market's expectation that the Bank of England will raise interest rates by 100 basis points at the November monetary policy meeting has dropped significantly, but a 75 basis point interest rate hike is still the mainstream market expectation. A delay in the publication of the medium-term fiscal plan could allow the Bank of England to make policy decisions and economic forecasts without knowing the details of the plan, adding to the uncertainty facing the Bank of England's monetary policy meeting, research suggests.

Traders are betting on a 75 basis point rate hike next week. The Bank of England's meeting on interest rates next week is complicated. At that time, the Bank of England will make its latest monetary decision and release economic forecasts without knowing the fiscal details. Despite a major upheaval in British politics, it may be just a "small episode" in the Bank of England's path to monetary tightening. Although the Bank of England has started raising interest rates since December last year, inflation in the UK has remained high.

The Bank of England will also start the active quantitative tightening process on November 1. As early as February this year, the Bank of England began to passively implement quantitative tightening. At the interest rate decision on September 22, the Bank of England announced that it will actively sell British government bonds from October 3 and actively quantitative tightening. After the previous tax cuts caused market turmoil, the Bank of England announced emergency bond purchases to rescue the market, and the plan to sell British government bonds originally scheduled to start on October 3 was postponed to October 31.

Sunak is considering cuts of up to £50bn a year to fill a huge gap in public funding, people familiar with the matter said. But ministers hope the measures will not have to be fully implemented in the Treasury's autumn report due on November 17. Current market forecasts are that the implementation of drastic spending cuts and tax hikes is likely to be avoided on November 17 as the outlook for UK borrowing prices improves. Sunak met with Treasurer Hunt on Thursday to discuss the "pretty grim" fiscal outlook and to discuss the autumn report closely. A report on Treasury supply showed that while the bond market has calmed down, the outlook remains bleak. The UK is facing an economic crisis and has a huge fiscal black hole to fill

Data released by the Office for National Statistics showed that the UK consumer price index (CPI) rose 9.4% in June from a year earlier, and deteriorated further in July. In the UK, the CPI rose by 10.1% year-on-year in July, and the inflation level exceeded double digits. After a slight drop to 9.9% in August, the UK CPI rose 10.1% year-on-year in September, returning to the recent high in July. Among them, the increase in food prices contributed the most to the year-on-year growth of the UK CPI in September.

Sterling could fall further as the Bank of England may raise interest rates less than expected at its Nov. 3 meeting, ING said. Market expectations for a rate hike at next week's Bank of England meeting have begun to be slightly lower than the previous 75 basis points since former British Prime Minister Trazie scrapped many controversial tax cuts during his administration, ING said in a report. And expect interest rates to rise to 3.00%. At the height of the fiscal policy-induced turmoil, markets had expected rates to rise to 3.90%. Analysts at the bank see a greater chance of a 50 basis point rate hike from the Bank of England than is currently priced in by the market, which is negative for the pound.

GBP/USD daily candlestick chart shows:

The bulls have brought about a slow rise to maintain a narrow range, the short-term bullish sentiment is still the same, and the bullish momentum in the market continues to rise. The top suppresses focus around 1.19054, and the low support focuses around 1.11943. The MACD indicator is on the upper side of the 0 axis, and the RSI indicator is at 50. The balance line hovers on the side, as shown in the figure:

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