Home Daily Commentaries Broader risk on sentiment supports the pound

Broader risk on sentiment supports the pound

Wednesday 26 October, 2022

Daily Currency Update

Yesterday saw the official announcement of the new Prime Minister of the UK, Rishi Sunak. His speech in front of his new home, 10 Downing Street, was both realistic and pragmatic, and warned that the UK economy is going through a very difficult time, and tough decisions would have to be made. This pragmatism has been taken by the market as overall positive, and is seen as a sign that the new government will now implement more sensible and thought out fiscal policy measures, that though maybe painful for UK households in the short term, will hopefully allow the economy to rebound and sustainably come out of this difficult period. All eyes are now on the next budget, expected to have been laid out by the new government on Monday, the 31st of October. However, with the tight schedule and timelines, there is a chance this could be delayed by a few days. The expectation is that Sunak and Hunt will want to have laid their fiscal plans out ahead of the Bank of England's next monetary policy announcement on Thursday the 3rd of November. We also saw a drop in UK bond yields to levels not seen since Truss and Kwarteng's disastrous budget, signalling further optimism for Sunak's new regime while reducing borrowing costs for the UK government. The pound has now risen sharply, testing levels in and around 1.15 and potentially above. However, there is ongoing concern that Sunak's fiscal plans to now tighten a grip on public spending and increase taxes sharply could squeeze the average UK household a little too hard, as warned yesterday by the head of the CBI.  

Key Movers

The EURUSD currency pair, the most widely traded currency pair in the FX markets, has breached above the significant psychological parity level, on expectation that the European Central Bank, which has banished its historic dovish stance for a more recent hawkish tone, will raise interest rates aggressively when it meets tomorrow. The Eurozone is quiet on the data front, so it is this monetary policy announcement which is being watched closely by the market. The expectation is for a 75 basis point hike from the central bank, but it will be Lagarde's tone and message which will be watched closely for forward guidance and next moves. With the heightened concerns around the war in Ukraine and the use of dirty bombs, global risk aversion is never too far away, and in this fickle FX market, one must remain wary of US dollar strength during a time of heightened popularity for the greenback currency. Investors also remain cautious as big companies keep reporting earnings. So far, the results have shown more than half of US companies listed in the S&P 500 have exceeded estimates which has nullified concerns over recession in the US, however some tech giants haven't fared as well as thought. Next Thursday, the US will report their first estimate of Q3 GDP, forecasted to indicate a 2.4% annualised growth in the quarter. The figure may boost equities to the detriment of the dollar, moreover, now that market participants are suspecting that the US Federal Reserve will soon start slowing the pace of quantitative tightening.

Expected Ranges

  • GBP/USD: 1.1480 - 1.1625 ▲
  • GBP/EUR: 1.1510 - 1.1595 ▲
  • GBP/AUD: 1.7790 - 1.8010 ▲
  • EUR/USD: 0.9975 - 1.0080 ▲