How will Sunak’s Victory affect GBP?

FBS Analysts

The British pound is trading in the horizontal channel between 1.0920 and 1.1470 as Prime Minister Liz Truss resigned last week leaving the country’s future uncertain

What is going on?

The British pound is trading in the horizontal channel between 1.0920 and 1.1470 as Prime Minister Liz Truss resigned last week leaving the country’s future uncertain.

Truss was the shortest-serving prime minister in British history with just 44 days in office. However, these 44 days were enough to crash the bond market and send the British pound to historic lows. Sterling dropped as Truss proposed to reduce income tax. The plan was to help the UK economy get out of the crisis and open the country to international investments. However, the tax cut was designed for the people who earn more, not for everyone. Plus, there were many questions on how the government would finance this project. As a result, the markets didn’t support the plan and GBPUSD lost over 9000 points within the next two days, while the 2-year bond yields plummeted below 4%.

The situation changed after the government abandoned the plan on September 26. GBPUSD bounced to the pre-announcement levels. Meanwhile, the bond market cannot recover from the shock, and the 2-year bond yields have already slipped to around 3.4%.

What will happen next?

Truss beat Rishi Sunak to become the Conservative Party’s leader following Boris Johnson’s resignation on July 7. On Monday, October 24, Sunak was elected to become a new UK’s Prime Minister. It’s hard to imagine he will repeat the risky moves regarding the country’s monetary and fiscal policy since it will immediately end his career. Currently, a new PM has two main goals to achieve:

  • Return international investors’ trust in the UK economy.
  • Slow down the inflation growth.

On November 3, the Bank of England will decide whether it will raise the key rate by 50- or 75-basis points. In our view, the new Prime Minister will take tough steps against inflation in the first days of work. Therefore, we believe that the Bank of England, despite its formal independence, will choose a more hawkish scenario for the key rate, strengthening the GBP against other, weaker currencies, especially the JPY.

Still, the GBP might remain weak against the US dollar as the key rate in Great Britain remains far below the US rate, while the inflation outperforms, and the energy crisis continues.

Technical analysis

GBPJPY, H4 chart

GBPJPY remains in a strong uptrend despite the Forex market interventions from the Bank of Japan. We consider every pullback a buying opportunity as long as the price stays above the 167.00 – 167.60 support range. The level of 171.50 looks like a great short-term target for the pair, especially after a breakout above 170.00.

Talking about the middle term, we expect the pair to reach 176.50 if the Bank of Japan doesn’t make any fundamental changes in its monetary policy.

GBPUSD, daily timeframe

GBPUSD is trading under the 50-day moving average a week ahead of the Federal Reserve and the Bank of England statements. Unsurprisingly, the FOMC decision will drive this pair the most during the next week.

If the price breaks above the 1.1470 resistance level, it will most likely reach the 100-day MA. Otherwise, it will decline lower to 1.0950, 1.0650, and even 1.0400.

 

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