Markets need to be prepared. Otherwise, hysteria will happen to them. The Fed knows this very well, which, looking at the "taper tantrum" of 2013, began to gradually introduced investors the QE curtailment in 2021. But governments communicate with the markets less often. Unless they have to. UK Prime Minister Liz Truss, amid a sharp decline in the ratings of her Conservative Party, was forced to admit a mistake. More attention should have been paid to preparing investors for tax cuts. However, the help of the Bank of England smoothed out this oversight: the GBPUSD pair, after sinking to a new anti-record, completely regained the lost ground.
The worst month for sterling since 2008 and the best week since 2020. It is rare to find such a breathtaking roller coaster in Forex. The presentation of the fiscal stimulus package to the general public turned into a large-scale sale of British bonds and the fall of the GBPUSD to a new historical bottom. Only the suspension of the quantitative tightening (QT) program and the resuscitation of quantitative easing (QE) allowed the bulls to recover.
The reaction of the debt market to the actions of the government and the Central Bank
With the BoE's intention to spend £65bn to stabilize financial markets, many thought the worst was over. The panic is over. But what will happen after October 14, when the program ends? The Bank of England will return to QT again and continue the cycle of raising the repo rate. Its policy will be contrary to the actions of the government. In addition, the reputation of the regulator was dealt a blow. Rumors began to circulate in Forex that Andrew Bailey and his colleagues are on the sidelines of the Cabinet of Ministers and are ready to finance the embarrassed government of Liz Truss by printing money.
Indeed, due to the fiscal stimulus package and the associated S&P downgrade of the UK's credit rating outlook to "negative" and panic in the financial markets, the gap in the popularity of Labor and the Conservatives has widened to 33 points. Elections will be held in 2024.
Contradictions in monetary and fiscal policy and shaken confidence in the Bank of England and the Cabinet of Ministers are far from the only problems of the pound. Britain remains the only G7 economy still smaller than it was before the pandemic. Due to the energy crisis, the country is on the verge of recession.
Dynamics of the G7 economies
Thus, the markets managed to calm down. And this is good news for sterling. But is it enough to continue the GBPUSD rally? Personally, I doubt it. The pound has many unresolved issues, including the echoes of Brexit. It is unlikely that this currency is capable of a long rally. On the contrary, the US dollar continues to be in high demand as a safe-haven asset, and the Fed is able to bring the federal funds rate up to 5%.
Technically, there is a consolidation in the 1.105–1.1265 range on the 4-hour GBPUSD chart. An unsuccessful test of its upper border with a subsequent return to 1.115 is a reason for selling within the false breakout pattern.
