Liz Truss New British PM as Pound Hits Lowest Level Against U.S. Dollar Since 1985

The British pound hit its lowest level against the U.S. dollar since 1985 as the U.K.’s dismal economic situation spirals out of control. GBPUSD fell as low as $1.1443 before recovering to trade up 0.1% midday London time Monday after Liz Truss was declared leader of the Conservative Party and the next British Prime Minister. Sterling collapse is a flow on from the U.S. dollar rally which has driven the euro and Japanese yen hit twenty years plus highs. The weak pound in turn exacerbates a surge in energy costs and the depths of Britain’s economic recession.

New UK PM Liz Truss with a lot of work to do

GBPUSD fell 4.6% against the dollar in August, its worst month since October 2016. Britain’s Government regulator OFGEM announced the typical household energy bill will see an 80% increase from the current energy price cap to GBP3,549. A look at 200 years history of Sterling shows you how far it has fallen.

The pound has never been worth less than $1, Euro achieved parity again this year, against the US dollar in the more than 200-year history of the currency pair. In 1985 sterling fell to $1.05, before the world’s largest economies joined forces to weaken the U.S. dollar under the so-called Plaza Accord.

Source: WSJ

GBP is undermined by political risk and recession fears.

The upcoming week will be heavy on UK data, which could mean even more of an eventful week for the British pound. Cable parity is now doing the rounds.

More Volatility the Week Ahead

  • The European Central Bank’s policy decision on Thursday, with a majority of analysts anticipating a three-quarter point hike while money markets place 70% odds on such an outcome
  • Bank of England policy makers speech due from Catherine Mann as well as testimonies to Parliament by Governor Andrew Bailey, Huw Pill, Silvana Tenreyro 
  • Bond sales including inflation-linked notes are due from Germany and Austria totaling 3.825 billion euros ($3.8 billion).
  • The UK sells bonds maturing in 2025 and 2032 for up to 6.25 billion pounds ($7.22 billion)
  • Tuesday, September 6, Britain’s new Prime Minister Liz Truss will be sworn it

Higher energy prices and supply disruptions stemming from the Ukraine war is depressing growth in Europe. Any kind of weakening demand in China for British goods could also weigh heavily on the region.

With the British Chambers of Commerce forecasts the UK is already in a recession with inflation to hit 14% later in the year. The surge in interest rates and the de-risking of the world is one factor but there are other particular influences.

Goldman Sachs warned U.K. inflation could top 22% next year amid the spiraling energy costs. The bank estimates the U.K. economy would contract 3.4% in that scenario.

The U.K.’s current-account deficit ballooned to a record 8.3% of gross domestic product in the first quarter, in part due to the rising cost of fuel imports. This has put more pressure on cable with the selling of pounds to pay for imports.

With regards to volatility in currency markets, these huge moves act like rubber bands when its crowded. The more stretched an exchange rate is, the bigger, faster and more painful the eventual correction. What is the catalyst? There is the obvious, a peace deal in Ukraine or a dovish Fed, which after Chairman Powell’s speech at Jakson Hole that appears to need a dramatic change.

Rates and Foreign Investment

  • Bank of England MPC at its July meeting Thursday raised the key bank rate by 50 bps from 1.25% to 1.75%
  • U.K. 10-year gilt yields rose 19 bps to 2.60% (up 163bps).
  • The yield on the U.K. 10-year government bond rose to 2.880% from 1.808%, the biggest monthly rise since 1990.
  • Foreign investors sold £16.5 billion worth of U.K. government bonds in July, according to data from ING and the Bank of England, the largest amount since July 2018.
  • International investors have cut back holdings of U.K. stocks. A Bank of America survey of global fund managers showed 15% were underweight U.K. equities in August, compared with 4% in July.

“The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone.”

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth.”

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Jerome Powell’s Jackson Hole speech

Technical Outlook

British Pound – GBPUSD

It is still hectic for Sterling with a new leader in Liz Truss with Truss the favorite. GBP posted its worst monthly loss since late 2016 in August and that path continued into early September with a GBPUSD low of $1.1443, a new low since March 2020 and near the fib extension 1.618 level around the 1.1432. The losses came on the back of a resurgent US Dollar. British pound continues to have difficulty since it’s vicious move down in July that reversed to unchanged by the end of the month. Cable lost all of the steam from its biggest weekly gain since December 2020 against the dollar to above $1.26 to be smashed to the bottom channel under -1/8 and 1.1500 after retesting the channel and Tenkan.

Euro Pound – EURGBP

EURGBP rejected the upper channel after the Truss PM win, it has been in the doldrums since it back tested 50wma and cloud which broke and advanced significantly this week to the top of the channel and immediate level of resistance at 0.8670 proved prohibitive. EURGBP support under Kijun with Tenkan.

Sources: TC WSJ

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