GBP/USD higher as Hunt rips apart mini budget

The pound rose – although not very convincingly – in response to the government’s unprecedented fiscal U-turn today, as new Chancellor Jeremy Hunt basically reversed everything announced in the controversial mini-budget. The GBP/USD climbed to a session high of 1.1331 before midday and then it slumped some 65 pips from there, before bouncing back again. The other GBP crosses were firmer, too, along with the FTSE and government bond prices, as yields fell.

So, we have seen almost a complete U-turn on all the flagship measures Liz Truss had announced, raising serious question marks over her position as PM. The fact that we have not seen a bigger reaction in the markets is understandable. Investors are wary of the political situation, which remains tense, and a lot could still change. For now, there is a bit of hope that Jeremy Hunt will help bring the country’s public finances back in order. But his work is undermining under-pressure PM Liz Truss, who some argue is on borrowed time. As a result, traders remain very cautious, and thus unwilling to commit in one or other direction. This should mean continued volatility for sterling.

The slightly calmer tone in the markets were reflected in UK bond yields falling:

It is worth keeping a close eye on yields, as the Bank of England has ended its temporary bond buying, which could mean the return of excessive volatility.

As mentioned, new Chancellor Jeremy Hunt decided to basically reverse all of Prime Minister Liz Truss’s tax cuts that were set out in her government's mini-budget a few weeks ago, as he insisted that it is not right to borrow in order to fund tax cuts. Among the changes announced to the controversial mini-budget, include:

The basic rate of income tax will remain at 20p indefinitely, rather than being reduced to 19p
The cap on energy prices charged to households is now only guaranteed until April, although it will then be reviewed

But cuts to stamp duty and National Insurance remain in place.

Will BoE be forced to intervene again?

There is arguably an even larger elephant in the room…

The Bank of England’s temporary bond buying is ended on Friday. What will this mean for borrowing costs, and mortgages… and by extension the pound and FTSE?

With the BoE no longer going to be purchasing long-dated bonds, the potential for yields to rise again means there will be pressure on UK asset prices.

The US dollar meanwhile is also continuing to apply pressure on the GBP/USD, after a stronger CPI report and UoM’s inflation expectations data last week raised calls for more aggressive rate increase from the Fed.

In the UK, the political turmoil and a near 10% inflation rate means consumer and business budgets will continue to get stretched as we head towards the winter months.

The BoE has to keep on hiking interest rates because of the very high inflation rate. This should keep bond prices under pressure and yields underpinned.

UK CPI in focus on Wednesday

After edging back below 10% in August, CPI is likely to have remained elevated in September due to the latest slump in the pound, which has surely boosted the price of imported goods further. If CPI doesn’t come down sharply, the pressure on the BoE will grow even more. Aggressive rate hikes to bring CPI down will only boost bond yields further, raising borrowing costs for the government and households alike.

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.