British rating downgrades, pound and dollar fall again

Sterling rose 0.04% to 1.1159 against the dollar, after hitting an intraday high of 1.1494. With a lack of fiscal credibility and the Bank of England's more aggressive tightening bias in 2023 weighing on the country's growth, sterling's gains could soon stall, risking another test of 1.08 before the end of the year.

The U.S. Commodity Futures Trading Commission CFTC foreign exchange non-commercial position report shows that as of 2022-10-04 the week (hands) long positions of sterling decreased by 17753 hands to 42078 hands. Sterling has been recovering from losses following a failed budget, and the Bank of England's decision to end its emergency gilt purchase program will be crucial for the pound going forward.

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The pound fell and U.K. government bond yields climbed after ratings agency Fitch downgraded the outlook on the credit rating of U.K. government debt to "negative" from "stable" on Wednesday. Rival Standard & Poor's has made similar moves in the past few days. Sterling will remain under pressure on the back of concerns over the UK's structural challenges and policy credibility.

"The Bank of England even announced that it did not buy any UK gilts as part of its emergency programme triggered by last week's sell-off," said Deutsche Bank economists. "The Bank of England seems to want to signal that it wants to intervene as little as possible. To calm the bond market. For now, this is a positive sign for the pound.

Whether BoE Bailey will actually end the program on October 14 as announced. Sterling could benefit significantly if the BoE will end its purchases as planned, as the bank will signal accordingly that it is sticking to its restrictive path. On the other hand, if the program continues due to fears of another rise in long-term market interest rates, the pound could weaken again.

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Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The impending recession appears set to be deeper and more prolonged than we had previously expected, reflecting the impact of mortgage refinancing on incomes. long-term hit and a weaker pound." Much of the blame lies with the new Truss government, which has "made a mess" of the mini-budget.

Sterling has endured a turbulent year, posting its worst losses in the second quarter. The latest data released by the IMF shows that the central bank's official reserve managers reduced their exposure to a range of currencies, including the pound, during this period. The pound's losses were larger than the 5.37% drop in dollar-denominated sterling holdings declared to the IMF at the end of September for inclusion in its second-quarter currency composition of official foreign exchange reserves (COFER) report.

GBP/USD daily candlestick chart

After the low-level bulls rose strongly, the high-level met resistance and retreated, the market bearish sentiment was shrouded, and moved downward again in the short term, the top suppression focused on the vicinity of 1.14777, the low-level support focused on the vicinity of 1.07108, the MACD indicator was in the bearish area to maintain order, and the RSI indicator was at 50 equilibrium Hovering on the lower side of the line; as shown in the figure:

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