UK Prime Minister Truss Apologizes For “Mistakes”

The UK’s new Prime Minister Liz Truss apologized yesterday after revelations of the mini-budget statement caused an upheaval in financial markets which required the Bank of England (BoE) to step in to stave off systemic risk emanating from large pension funds as bond yields accelerated.

The new finance minister Jeremy Hunt yesterday scrapped just about everything that was initially proposed on the 23rd of September by ousted finance minister Kwasi Kwarteng. In particular, the substantial energy price cap scheme – Truss’ major campaign objective – was shortened to the end of April 2023 instead of October 2024, dealing her a political setback. 5 MPs have already publicly called for her removal which might prove difficult seeing that there cannot be a vote of no confidence within her first 12 months. However, if a substantial majority insists she vacates office, all involved can vote for a rule change to have her removed sooner.

The market response has been more or less in line with what you would expect. Fiscal reassurance communicated by Jeremy Hunt saw cable move higher, towards the 1.1410 level of resistance. On the daily chart, this level appears to be one where buyers have run out of momentum as a series of lower moves have ensued from the level after producing upper wicks.

However, the longer-term bearish mood remains for cable as the Fed continues to hike without the constraints experienced by the BoE via the recent pension/bond market difficulty. Additionally, in times of financial distress, dislocations, or systemic threats, the US dollar is the preferred currency to hold in the event of a liquidity strain, which is only likely to see it supported in the near to medium term.

GBP/USD Daily Chart

(Click on image to enlarge)

Source: TradingView, prepared by Richard Snow

The 4-hour chart shows the cable’s recovery but also highlights the limitation to upside momentum at the 1.1410/1.1461 area. GBP/USD is unlikely to reveal a directional preference until there is more clarity on the political front as markets remain highly reactionary and volatility remains elevated as shown by the average true range indicator in the daily chart above.

GBP/USD 4-Hour Chart

(Click on image to enlarge)

Source: TradingView, prepared by Richard Snow

While cable has recovered from its lows, the bond market recovers at a different pace with shorter-term yields moving sharply lower but the 20 and 30-year yields remain higher than before the mini-budget. The Bank of England intended to continue bond sales next week but decided against it considering the instability and volatility of the bond market. Unlike in the U.S., the rise in yields has not resulted in GBP strength as it only serves to compound economic woes and the cost of living squeeze.

UK Government Bond (Gilt) Yields (2, 10, 20, 30 years)

(Click on image to enlarge)

Source: TradingView, prepared by Richard Snow

Tomorrow, UK inflation data is likely to underscore the need for the BoE to hike rates once again on the 3rd of November. Markets have priced in 94 basis points worth of tightening which could be setting up the pond for a bearish repricing if the Bank opts for a more conservative 75 bps hike considering the recent instability.

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