The new British Prime Minister stopped abruptly, and the market was full of chicken feathers

British Prime Minister Truss announced his resignation, ending a short 44-day term; the Conservative Party will try to avoid holding a general election before the 2025 deadline, and the latest polls show that the Conservative Party will suffer a landslide defeat. If Conservative MPs fail to agree on a future prime minister, a general election could be held in the UK.

The U.S. Commodity Futures Trading Commission CFTC foreign exchange business position report shows that as of the week of 2022-10-18 (hands) sterling long positions increased by 14685 to 194385; GBP/USD fell 0.65% to 1.1104, with an intraday high of 1.1439. Amid the 180-degree turn in the government's fiscal policy and the continued political instability, the market expects the Bank of England to raise interest rates less aggressively and lacks bullish belief in the pound.

Truss resigned after his unfortunate economic strategy crashed the market and lost support in his party. At the height of the market turmoil in late September, we estimated that the interest rate premium for UK gilts relative to the rest of Europe was almost a full percentage point, but it has now retreated to a negligible amount.

That means two things: the size of the fiscal gap facing Chancellor Hunt has narrowed, and confidence in the UK has returned, reducing the need for a big rate hike by the Bank of England. Taking into account the government's announced policies so far and Thursday's yield curve, some £24bn would need to be consolidated to put the debt on the same trajectory as the Office for Budget Responsibility's March 2022 forecast.

Markets reacted little to the resignation of British Prime Minister Truss. The market expects the pound to remain stable until the announcement of the new prime minister; after that, the focus will be on the announcement of the medium-term fiscal plan and the Bank of England's interest rate decision on November 3. Up to three candidates can be nominated for the race, with a new leader likely to be announced next weekend.

However, if only one candidate is nominated, it may result in an early announcement of the results. In addition, after disappointing markets in previous months, the Bank of England is expected to have to raise rates by at least 75 basis points, possibly even 100 basis points; the Bank of England also has a case for raising rates by 75 basis points in December. If the Bank of England fails to deliver a full and credible rate hike, supported by hawkish forward guidance, the pound could come under selling pressure again.

British Prime Minister Truss stepped down because of opposition, in large part because he did not improve the economic crisis facing the United Kingdom. Next week's prime ministerial race will undoubtedly be the focus of the market's attention, with former finance minister Sunak now appearing to be the most vocal. If he can take over and use his ability to bring light to the British economy, the pound is expected to come out of the doldrums, and investors need to keep an eye on it.

Market data showed that former Chancellor of the Exchequer Sunak had a 47.6% chance of taking over, House of Commons leader Mordaunt had a 25% chance of taking over, Defence Minister Ben Wallace had a 12.5% chance of taking over, and current Chancellor of the Exchequer Hunt would take over. The probability is 10.2%, and the probability of former Prime Minister Jensen taking over is 7.1%. In addition, investors' bets on the Bank of England raising interest rates by 75 basis points next month rose to 92%.

Market participants believe that no matter who will be the successor to Prime Minister Truss, one thing is clear - the pound will continue to fall. Sterling is expected to remain under pressure and fall to 1.09 by the end of the year, and investor confidence in gilts and sterling will take time to recover. And now the political turmoil in the UK is making it increasingly difficult for investors to regain confidence.

In addition, the key events that will determine the trend of the pound in the future may be the announcement of the fiscal plan and the rate hike of the Bank of England. However, it was reported earlier that the announcement of the medium-term fiscal plan was postponed again, and the deputy governor of the Bank of England also expressed that he did not confirm the central bank. Whether a substantial rate hike is needed. Tim Baker, head of macro research at Deutsche Bank, said: "We are bearish on the pound overall, but more because of stagflation and doubts about whether the Bank of England will take the necessary aggressive steps."

Now back to the prospect that the economy will be hit by soaring energy prices and the cost of living crisis. So, with the Bank of England doing nothing (and not helping anyway), higher inflation is a tough pill to swallow for GBP.

Previously higher inflation figures tend to be associated with a positive exchange rate response, mainly due to more aggressive pricing by the Bank of England, but after what has happened over the past few weeks, the situation for GBP is quite different. Markets had expected the Bank of England to continue to tighten policy ahead of the mini-budget, and after the mini-budget was announced, traders' expectations for more aggressive measures increased.

Viraj Patel, global macro strategist at Vanda Research, said that it is difficult to see a good performance for the pound. Truss resignation may initially remove the uncertainty premium from the market, but it will ultimately depend on who takes over as the next British Prime Minister. The market needs a stable 's leader.

Viraj Patel said that his views have not changed, it is difficult to see a good performance of the pound, and the market may have other reactions. Stocks should bounce back and interest rate hikes should ease a bit, but in the absence of strong confidence, GBP could trade sideways as largely mini-budgets have done the damage.

GBP/USD daily candlestick chart shows:

The volatility space is gradually narrowing, showing a narrowing triangle trend. The top suppresses focus on the vicinity of 1.15446, and the low-level support focuses on the vicinity of 1.08786. After the first overall volatility is narrowed, it faces a new round of breakthroughs. The MACD indicator remains in the short area and moves up to the 0 axis. The side is weak and hovering, and the RSI indicator is in a weak order near the 50 equilibrium line, as shown in the figure:

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