GBP/USD Fundamental Backdrop

The pound pared back yesterday’s gains this morning after the announcement of the new UK Prime Minister (PM) Rishi Sunak. Markets received the news in a positive light but this does not take away from the current economic turmoil in which the UK economy finds itself. Today marks the official appointment of Rishi Sunak as PM of the UK by King Charles after which he is scheduled to make an address. Mr. Sunak has thus far been very protective over his intentions regarding changes to the current cabinet as well as major policy shifts. It is however expected that he looks to curbing spending and increasing tax while retaining the newly elected Chancellor of the TheExchequerJeremy Hunt. With regard to the cabinet, the PM has two choices:

1. Appoint faithful supporters.
2. Assign posts to the most qualified personnel for the role.

All of this comes at a time when the UK is in the recessionary territory with the possibility of an energy crisis as the region heads into the winter months. One positive that can be taken from the new PM is that fiscal and monetary policy can be streamlined to tackle inflation which is why UK government bond yields (GILTS) have pulled back – both short and long-term (see graphic below).

UK 2/10/30-Year Government Bond Yields

(Click on image to enlarge)

Chart prepared by Warren Venketas, TradingView

The resultant impact is also reflected by money market pricing for the Bank of England (BoE). November’s meeting looks to favor a 75bps interest rate hike pushing the overall rate up to 3% at a 63% probability.

BOE Interest Rate Probabilities

Source: Refinitiv

Looking ahead, the economic calendar is dominated by U.S.-centric data with a focus on consumer confidence for October. Estimates point to a lower print than September’s read with a miss likely extending GBP gains.

GBP/USD Economic Calendar

Source: DailyFX Economic Calendar
 

Technical Analysis

GBP/USD Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

Technically, price action on the daily cable chart looks to be developing into an ascending triangle formation (blue). A confirmation break (daily candle close) above triangle resistance and 50-day EMA (blue) could open up room for a re-test of the 1.1500 psychological handle.

Though the chart pattern has bullish connotations, the Relative Strength Index (RSI) objectively reflects the current market environment. The RSI level is hovering around the 50 zone which favors neither bullish nor bearish momentum and considering the poor fundamental state of the UK economy, a new PM is unlikely to significantly change GBP fortunes short-term.

Key resistance levels:

• 1.1500
• Triangle resistance/50-day EMA (blue)

Key support levels:

• 20-day EMA (purple)
• Triangle support
• 1.1000
   

Bearish IG Client Sentiment

IG Client Sentiment Data (IGCS) shows retail traders are currently 61% LONG on GBP/USD (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a short-term downside bias.

More By This Author:

Euro at Crossroads as ECB Rate Hike Looms While Crude Ponders China’s Growth Outlook
USDCNH Soars, S&P 500 Diverges From Chinese Markets, USDJPY Falls Short Again
Copper Price Outlook: US PMI Miss, China Government Shakeup Bode Poorly For The Red Metal