- Investors are dumping the pound due to a lack of trust in the UK’s fiscal policy.
- Markets are concerned the new government will stretch Britain’s budget to breaking point.
- Investors are awaiting a response from the BoE.
Today’s GBP/USD outlook is bearish as investors fled the market after the new government’s economic strategy threatened to strain Britain’s finances to their breaking point. This decreased the pound’s value by close to 5% on Monday.
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The currency plunged as much as 4.85% to an unprecedented $1.0327, continuing a 3.61% plunge from Friday after finance minister Kwasi Kwarteng unveiled historic tax cuts and the largest rise in borrowing since 1972 to pay for them.
In office for less than three weeks, the government of Prime Minister Liz Truss is losing its financial credibility for announcing such a proposal just one day after the Bank of England raised interest rates to combat rising inflation.
“Sterling is getting hammered,” said Chris Weston, head of research at Pepperstone.
“Investors are searching for a response from the Bank of England. They’re saying this is not sustainable.”
“In this environment, you either need to see much higher growth – which isn’t happening at the moment – or you need to see significantly higher bond yields to incentivize capital inflows. To get bond yields up to those levels, you need to see the Bank of England coming out and doing an emergency hike,” he added.
GBP/USD key events today
Pound investors will pay little attention to economic releases and will likely continue reacting to the political and macroeconomic events today. They will also pay attention to a speech from MPC member Tenreyro who might touch on the current fiscal policy and its impact on BOE’s monetary policy.
GBP/USD technical outlook: Gains caped by 1.0800
Cable continued its sell-off on Monday, with the RSI extremely oversold. The freefall paused when the price found support at 1.0402, where buyers came in for a pullback. This pullback might, however, not go far beyond the 0.0800 psychological level as the price is still trading far below the 30-SMA, a sign that the downtrend is strong.
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The price will eventually retest and possibly break below support at 1.0402 when sellers return after the retracement.
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