Outlook on GBP/USD still bearish, relief rally likely to last until Nov 17
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THE Cable has seen a tumultuous month ever since Kwasi Kwarteng’s mini-budget of over £40 billion (S$65.6 billion) in unfunded tax cuts led to the currency pair plunging to an all-time low of 1.035 on Sep 26, 2022. Liz Truss’s disastrous reign, which also saw the Bank of England (BOE) launching a £65 billion bond buying programme to rescue the British economy, came to an end after she resigned on Oct 21. Truss was replaced by former chancellor Rishi Sunak while Kwarteng has been replaced by Jeremy Hunt.
As at the time of writing, on Oct 27, we saw the GBP/USD currency pair breaking past the key resistance level of 1.15 and climbing above 1.16, supported by renewed optimism surrounding the appointment of Rishi Sunak as Britain’s new prime minister and Jeremy Hunt reversing Kwarteng’s “mini-budget”. Furthermore, selling bias in the dollar provided an additional lift to Cable as investors renewed their bets on smaller rate hikes following disappointing macroeconomic data, leading to speculation that the Fed might slow their pace of rate hikes to avoid a policy error and tipping the economy into a recession.
On a technical perspective, we maintain an overall bearish outlook on Cable as the UK’s economic fundamentals remain poor. However, we expect the current relief rally to continue and result in Cable testing the immediate resistance of 1.165, which if broken, could move towards 1.175 (100MA) due to three main reasons:
1. The Cable saw a breakout through the upside resistance of an ascending triangle pattern on Oct 26, indicating the continuation of the uptrend that started since Sep 26. The currency pair is also well above the 50MA line, pointing to a strong momentum.
2. The Relative Strength Index 14 days (RSI14), a momentum indicator, is currently well above 50 at 61.4798, signalling bullish momentum in the currency pair.
3. The Moving Average Convergence Divergence (MACD) indicator also shows a bullish crossover signal as the MACD line has crossed above the signal line and remains above zero; similarly, the MACD histogram is also well above zero, signalling bullish momentum.
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We believe that the current relief rally will be short-lived and last until Nov 17, which marks the date when Hunt will release his medium-term fiscal plan alongside the Office for Budget Responsibility (OBR)’s assessment. Hunt’s proposed fiscal tightening measures, which include tax raises, cuts to public spending, and limiting the current price cap on electricity from April onwards, are likely to shift investors’ focus towards the economic reality of a fragile UK economy that is likely to enter a recession. At the same time, September’s CPI reading hit a 40-year high of 10.1 per cent, five times higher than the BOE’s 2 per cent target. With a recession largely being forecasted in the UK and the BOE expected to under deliver on monetary tightening with a 75bps rate hike, we expect renewed pound weakness from Nov 17 onwards.
Ultimately, with fiscal and monetary tightening being implemented at a time when the British economy is already struggling, this could result in weaker growth and a deeper recession. Thus, we maintain a bearish outlook on Cable and expect the current relief rally to last until the release of Hunt’s fiscal plan on Nov 17, when we believe a bearish reversal may occur. We could see Cable heading towards the previous resistance turned support level of 1.150, which if broken, may head towards 1.140.
The writer is strategist at Phillip Nova
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