Pound Sterling: EUR/GBP, GBP/USD Analysis
- New prime minister has her work cut out for her – inflation, energy and economic contraction
- EUR/GBP update: Bullish fatigue sets in as GBP attempts recovery. ECB on Thursday
- GBP/USD bounces off low on new PM optimism
New Prime Minister Inherits a Massive Undertaking
A number of recent developments have helped the pound bounce from its lows but the idea of a sustained bullish move is a tough one to get behind.
Markets appear to endorse with the appointment of Liz Truss as leader of the ruling conservative party, who is to be officially appointed as the UK’s new prime minister later today. The pound has mounted some resistance against what an awfully long period of sterling declines with very little good news on the horizon.
Truss ran a campaign that made strong promises to support households through this time of soaring inflation with tax breaks cited as one of the mechanisms of easing the current cost of living crisis. Reducing taxes appears attractive in the short-term but has concerning long-term implications like a sustained level of high prices due to people have greater disposable income. The UK has also watched its debt-to-GDP ratio go from 80% before the pandemic to nearly 100% as a result of pandemic-related stimulus.
Nevertheless, UK citizens are anticipating an 80% rise in household bills this winter meaning Truss’ plans to freeze household energy bills for 18 months couldn’t come at a better time. In addition, the new prime minister has further plans in the region of 40 billion pounds to assist businesses with rising energy costs. Therefore, the promises of relief to households and businesses is likely to support the pound in the short-run but the major issues of inflation (10.1%) and the anticipated recession will provide an uphill battle for the newly formed government and the pound.
EUR/GBP Update: Bullish Fatigue Sets in as GBP Attempts a Recovery
The pound has strengthened against the euro in a scenario presented in yesterday’s report, breaking beneath the 23.6% Fibonacci retracement of the major 2022 move at 0.8599. The tell tale signs of a potential bearish reversal in the pair emerged via the cluster of long upper wicks at the zone of resistance around 0.8660-0.8680.
Price action has subsequently traded below 0.8595, with the 38.2% Fib (0.8523) and the psychological level of 0.8500 as the next levels of support. On Thursday the European Central Bank is due to hike interest rates by 50 or 75 basis points, which strangely enough, could be viewed by markets as insufficient to boost the euro. Major central banks have hiked significantly more than the ECB, therefore, even a large hike may be viewed as too little too late. What may appease markets is any mention of an agreed increase in the terminal rate, however, this would require buy-in from all members of the rate setting committee.
Resistance appears at 0.8595/0.8600, although, this may simply be a retracement before a continued move lower. The bearish reversal looks to be invalidated should we trade above 0.8680 – above the prior upper wicks.
EUR/GBP Daily Chart
Source: TradingView, prepared by Richard Snow
GBP/USD Bounces from Low on New PM Optimism
Cable will mark two successive days of gains if we close in the green today. This comes after six successive days of losses as the pound continued to be snubbed in favor of the high flying dollar. GBP/USD appears to be attempting a retracement of the longer-term trend, approaching and bouncing off the pandemic low of 1.1420. The next level of resistance lies at 1.1685 before the psychological 1.2000 which, admittedly, is a long way away. Headwinds for the pound remain, bringing a bullish reversal into question.
GBP/USD Daily Chart
Source: TradingView, prepared by Richard Snow
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--- Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
