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Sterling rises on rumours

Friday 14 October, 2022

Daily Currency Update

Sterling had a very volatile day yesterday as rumours started to surface that prime minister, Liz Truss and Chancellor of the Exchequer, Kwasi Kwarteng would have to reverse some, if not all of their planned tax cuts. The head of the IMF, Kristalina Georgieva, speaking at a news conference in Washington, said the chancellor should not prolong the pain of the planned policies and make sure the books are balanced. This was in reference to the mini-budget which was received terribly by the markets at the end of last month. Despite Kwarteng's defence of the budget in an interview with the IMF, it is believed work has already started in Downing Street to backtrack on policies pledged. Sterling jumped on the news, taking GBP/USD up to a session high of 1.1364 and GBP/EUR touched 1.1600. Both these currency crosses are lower this morning as market participants await further updates.

Today will likely remain volatile for the GBP as we wait on confirmation that the rumours are true. Especially as the Bank of England’s (BoE) support for UK government bonds (GILTS) is due to end today. If we see no news on Friday regarding the retracted policies, or further support from the BoE for the GILTS market, GBP could certainly see a fall back to levels already seen this week. Also, if no change is seen at all, GBP could see fresh lows against both the USD and EUR. However, GBP will likely strengthen further if the opposite is seen.

Key Movers

The eagerly anticipated inflation figures were released from the US yesterday. Headline CPI y/y fell from 8.3% to 8.2% which is a third successive fall, but the market was more focused on the core reading that strips out volatile items like fuel and food. The core reading came in hot, seeing a rise from 6.3% y/y to 6.6% and on a monthly basis it pushed 0.6% higher when only a 0.4% was predicted. This takes core inflation to its highest rate since 1982. The news saw the USD strengthen against the EUR, taking the currency pair to a session low of 0.9630. The USD temporarily halted GBP's gains after the release, which were being seen in the UK off the back of rumours of a retraction in the recent mini-budget policies. The inflation figure has all but confirmed that the Fed's next policy meeting will see them raise interest rates as much as 75 basis points, with a future path to higher rate hikes also likely.

Expected Ranges

  • GBP/USD: 1.1180 - 1.1380 ▲
  • GBP/EUR: 1.1380 - 1.1610 ▲
  • GBP/AUD: 1.7650 - 1.8000 ▲
  • EUR/USD: 0.9630 - 0.9800 ▼