British policy adjustment regained market trust, pound and dollar rebounded from low volatility

UK government policy needs a U-turn to regain market trust. Although the chancellor said he would scrap a proposed tax cut for the wealthy, that took only £2bn ($2.3bn) off the £45bn tax cut package. The rest of the recent mini-budget is still in progress, including funding billions of dollars for energy price caps and other tax cuts, hurting Britain's debt sustainability. GBP/USD fell to an all-time low of 1.0350 on September 26 before rebounding almost 10%.

UK September Manufacturing PMI: The industrial sector is likely to remain in the next quarter as volatility in financial markets, increased economic uncertainty and a further rise in borrowing rates could exacerbate the headwinds from the cost of living crisis in a downturn, increasing the risk of recession.

The recent slump in UK bonds could end the country's pension fund's "bond cult". There is a potential for pension funds to pivot back into UK equities, which offer them "good value" and some protection against future inflation. Perhaps there will be a new cult of the stock market in the UK in the future.

The pound is expected to fall to 1.04 levels in 2023 as the UK economy slips into deeper stagflation, the current account deficit worsens and policy uncertainty remains high, said Alvin Tan, head of Asia FX trading strategy at RBC Singapore. , the pound will continue to be under pressure.

The pound is expected to continue lower, possibly to 1.05 by the end of the year, as the EU and UK energy crises take a heavy toll on the economy, said Stephen Innes, managing partner at SPI Asset Management. Real yields in the UK are too low to attract money, requiring the Bank of England to raise interest rates sharply to ensure the currency is supported, but this will only further hit the economy and hurt the pound.

Divya Devesh, head of Asia foreign exchange research at Standard Chartered Bank Singapore, said the UK's abandonment of tax cuts would not change the country's current account and fiscal deficit exceeding 7% of GDP. The reason for this, he said, is that the Bank of England has limited foreign reserves to defend the currency and could trigger a recession due to interest rate hikes. While GBP is likely to stabilize around 1.05 by the end of the year, it is difficult to completely rule out parity with the USD;

British policy missteps and the risk of a global recession could push the pound sharply lower next month, Commonwealth Bank of Australia strategists Joseph Capurso and Carol Kong wrote in a research note. However, if British government bonds can stabilize, the pound may continue to rise.

A weaker pound and government support for household energy bills were behind her push last month for the Bank of England's biggest rate hike in more than 30 years, and Mann said she was concerned about the pace of the Fed's tightening .

Markets now expect the Bank of England to raise rates by 100 basis points or more in November. Last week's budget plan launched by Prime Minister Truss caused violent volatility in financial markets. It is too early to judge how much the budget plan will affect the Bank of England's monetary policy. Mann also said that the Bank of England is assessing the price outlook. "Other Metrics" will be considered.