Treasury projections indicate that Britain's new prime minister, Rishi Sunak, and finance minister, Jeremy Hunt, are exploring tax increases and spending reductions in an effort to prevent a shortfall of between 30 and 40 billion pounds. The £50 billion figure has been bandied around because efforts to make up the shortfall (tax increases, spending reductions) may damage the outlook for the economy and lead to fewer tax collections in the future. According to reports, Hunt is looking into other options for closing the budget gap, including raising the windfall tax on oil and gas businesses.
Despite sterling's recent problems, the weekly GBP/USD chart shows that the pair is on track to post three straight weeks of gains. Extreme price moves are still possible, especially in light of the shock to the UK bond market and pension fund industry from late September to mid-October. Since printing the low in September, GBP/USD has displayed abnormally high volatility, which is still visible via the extended upper and lower wicks.
The psychological level between 1.1975 and 1.2000 appears to be the next key level of resistance now that price movement has surpassed the March 2020 bottom, but there are a few levels on the daily chart to be wary of.
The attempt at a bullish reversal by the GBP/USD on the daily chart is somewhat deceiving given the sharp decline. Since the moment of craziness that followed the release of the UK mini budget, the pair has barely rallied 2.6%, or less than 300 pip. Although the movement is not trivial, it is far too early to confidently predict a longer-term positive turnaround. Prices are still well below the 2021 highs of 1.4200.
Price is currently testing the 1.1490-95 zone (previous high) as support, then 1.1410, after it appears to have rejected the 1.1685 2016 low (2020 low). The prior indicated 1.2000 level serves as the next significant level of resistance if we see a bullish continuation over 1.1685.
As the FOMC gathers ahead of the November 2nd rate meeting, the PCE data released today will be compared to the upward surprise in the CPI from earlier this month. The recent decline in the value of the dollar was sparked by remarks made by Mary Daly of the Federal Reserve, who warned against overtightening and supported the idea of smaller gradual raises in future rate-setting meetings. However, if PCE data shows that inflation is still stubbornly high and the Fed intensifies its war on inflation by announcing future aggressive hikes, we may see a return of dollar strength and rising treasury yields from the present lower levels, which would push the GBP/USD rate lower.
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