Political Instability Rocks Pound

The British Pound is undergoing a sharp shift in sentiment this week. News of major political resignations yesterday have exacerbated the atmosphere of uncertainty and fear among UK investors. While the current UK administration has been no stranger to adversity, scandal and in recent times, almost falling apart, news yesterday of Rishi Sunak and Sajid Javid quitting cabinet was truly unexpected.

The moves, which were announced in protest at the PM’s involvement in scandal after scandal, are just the latest in a string of events pointing to a loss of confidence in the UK. The first of these events being the very literal vote-of-no-confidence held against the PM last month. With dark clouds gathering over the current government traders are increasingly concerned as to the near-term path of UK politics and what this will mean for the economy during such as difficult time.

BOE Issues Warning in Financial Stability Report

Along with the unexpected political developments we saw yesterday, we also had the latest Financial Stability Report update from the BOE. The report made sobering reading and saw the bank warning over the deteriorating economic outlook, both globally and domestically. The BOE warned that a spiralling global inflationary environment was having a harsh impact on businesses and consumers alike and looks likely to continue that way for some months to come.

Citing the impact of the war in Ukraine, BOE’s Bailey warned that current conditions will also make households and businesses more vulnerable to further shocks going forward. Bailey said “These higher prices, weaker growth and tighter financing conditions will make it harder for households and businesses to repay or refinance debt.” The BOE chief went on to say: “Given this, we expect households and businesses to become more stretched over coming months. They will also be more vulnerable to further shocks,”

BOE Raises CCyB Rate

Given the dire outlook, the BOE raised its capital requirements for British lenders yesterday. The BOE has told banks to raise their countercyclical capital buffer rate to 2% from 1%, as of July 2023. On this, Bailey noted that “Given considerable uncertainty around the outlook, the FPC will continue to monitor the situation. We stand ready to vary the UK CCyB rate — in either direction — depending on how risks develop.”

Rate Hike Expectations Slip

Notably, BOE rate hike expectations have since been scaled back a little into year end as traders judge that the BOE will opt to move at a more cautious pace. It’s a tricky time for the bank as it juggles the need to support the economy with the need to combat inflation. This dilemma has been clearly reflected in the volatility we’ve seen in the FTSE and GBP recently.

Technical Views

GBPUSD

The sell off in GBPUSD this year has seen the market grinding steadily lower within a well-defined bear channel. Price is now sitting on support at the .1934 level. With both MACD and RSI bearish, there are risks of a further breakdown below this level towards the 1.1474 level next. However, it wis worth noting we are seeing bullish divergence on momentum studies. Bulls will need to see a break of the 1.2355 level to alleviate near-term bearishness.