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British Pound (GBP) Forecast: GBP/USD Rally Stalls as Kwarteng Resigns and PM U-Turns

British Pound (GBP) Forecast: GBP/USD Rally Stalls as Kwarteng Resigns and PM U-Turns

Zain Vawda, Analyst

GBP Key Points:

  • Kwasi Kwarteng Resigns, Jeremy Hunt Named New Chancellor of the Exchequer.
  • Prime Minister Truss Confirmed the Corporate Tax Rate Will Increase to 25%.
  • Political Implications and the Way Forward.
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Outlook: Neutral

GBP Week in Review

The GBP surprisingly posted a week of gains against major counterparts as the UK dealt with a host of issues, in particular the continued disconnect between monetary and fiscal policy. Chancellor Kwarteng faced a barrage of criticism at the IMF Annual Meetings in Washington DC as Governor Bailey and the Bank of England (BoE) received backing for their recent bond- buying program. IMF Managing Director Kristalina Georgieva stated that the BoE’s bond-buying program was appropriate and addressed a risk to financial stability. There had been growing whispers since Wednesday regarding a potential U-turn on the proposed tax cuts which saw the pound strengthen and bond yields drop as a result.

Kwasi Kwarteng Resigns, Jeremy Hunt Named New Chancellor of the Exchequer.

The continued back and forth between BoE Governor Bailey and the government as well as the uncertainty in policy came to a head on Friday as Kwasi Kwarteng resigned ending his six-week reign as Chancellor. Kwarteng confirmed in a letter that PM Truss had asked him to step aside. This comes in the wake of turmoil that has swept through the UK markets since the mini-budget speech presented by the Chancellor on the 23rd of September. Kwarteng seemed to offer his support to longtime friend and ally PM Truss in his resignation letter, stating “your vision of optimism, growth and change was right”. He went on to say that the medium-term fiscal plan is crucial and that he looked forward to supporting the PM and his successor Jeremy Hunt from the backbenches. It should be noted that the incoming Chancellor Jeremy Hunt himself had pushed for tax cuts in the summer, calling for a reduction in corporate tax to around 15%. Given that Kwarteng had suggested keeping the rate steady at 19% instead of raising it to 25% the market reaction to Hunts appointment will be of particular interest as we head into the new week.

Chart, bar chart  Description automatically generated

The Truss U-Turn on Taxes Confirmed

Prime Minister Truss in her eight-minute press conference today confirmed the anticipated u-turn on tax cuts, in particular that she will follow through with the previous governments plan of raising corporate taxes to 25%. The move she said will bring in an estimated GBP18bn to the books. PM Truss said she wants to deliver a low tax, high wage and high growth economy with the PM intimating that her vision remains the same but it needs to be made palatable for markets to digest. Beyond that, the PM did not elaborate on any other changes to the Trussonomics mini-budget with Chancellor Hunt now expected to deliver the medium-term budget at the end of the month. The immediate aftermath saw Gilt yields rise across the board to reach intraday highs even though Chancellor Hunt has been described as a safe pair of hands. The reaction of markets may only be felt in full as the new week begins and more information trickles out of 10 Downing Street.

Political Implications and the Way Forward

PM Truss faced tough questions regarding her position which seemed to rattle her. The bigger picture is unclear on the political front with Liberal Democrat leader Ed Davey among those calling for an early election. He went on to say “This mustn’t just be the end of Kwarteng’s disastrous chancellorship, it should be the death knell of the Conservatives’ reckless mismanagement of our economy. It didn’t suddenly start with Kwarteng but it must end now.” PM Truss’ position remains uncertain as rumors have already begun that Tory MPs have been discussing the possibility of finding a consensus alternative. There remain more questions than answers at this stage with PM Truss’ position seemingly at the mercy of the market reaction moving forward. Should we see further market volatility in the new week there is every chance that PM Truss may become the shortest serving Prime Minister in UK history.

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UK Economic Calendar for the Week Ahead

The UK economic calendar is set to enjoy a quiet week as economic data will be sparse. Over the course of the week, there is only one ‘high’ rated data release.

Here is the one high ‘rated’ event for the week ahead on the economic calendar:

  • On Wednesday, October 19, we have UK Inflation numbers due at 06h00 GMT.

For all market-moving economic releases and events, see the DailyFX Calendar

GBPUSD D Chart, October 14, 2022

A screenshot of a computer  Description automatically generated with low confidence

Source: TradingView, Prepared by Zain Vawda

GBPUSD Outlook and Final Thoughts

The GBP posted losses on Friday without any crazy price swings as some might have expected. The overall bias remains bearish with resistance at 1.1500 while the long-term descending trendline remains in play around the 1.1750 area.

The new week could bring volatility as markets digest today’s events and more clarity is provided by PM Truss as well as the new Chancellor. Caution is advised in what could be a massive week for sterling and the UK economy as a whole.

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--- Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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