After the news that Prime Minister Liz Truss is resigning, the pound has completely lost all the positions that it managed to win back against the US dollar yesterday. The focus shifted to statements by the deputy governor of the Bank of England, Ben Broadbent. In an interview, he stated that it was unclear whether it was necessary to raise interest rates in the UK as much as investors anticipated. He warned of a blow to the economy if market rate forecasts come true.
The Bank of England is between two fires: where it has every reason to tighten policy, as the country continues to experience a rapid increase in inflation, but also a sharp slowdown in demand amid the cost of living crisis that only intensifies the economy's slide into recession. According to the politician, if interest rates remain at their current levels, GDP could suffer a 5% hit.
The comments indicate the caution of the Bank of England regarding how quickly it plans to tighten monetary policy further, as the risk of a more active UK sliding into recession is growing. Also, do not forget about the problems in the bond market, which appeared after Prime Minister Liz Truss first announced huge tax incentives. After the markets collapsed, she was forced to curtail most of the program, and yesterday it became known that Truss had resigned.
Many investors have already priced in an interest rate increase of more than one percentage point at the next meeting of the Bank of England. However, now some are beginning to abandon this idea gradually. The futures market shows that rates will exceed 5% in 2023, compared to the current 2.25%. Traders lowered their expectations after the politician's speech by about ten basis points. They now forecast an increase of 75 basis points next month.
Let me also remind you that the new Chancellor of the Exchequer, Jeremy Hunt, plans to unveil his financial plans on October 31. Broadbent said this would give the Bank of England time to include Treasury data in its rate decision and adjust economic forecasts due on November 3.
Broadbent also drew a clear distinction between the upheavals that the UK is experiencing and what is happening in the US. He also noted that inflation expectations have risen recently, but not as sharply as predicted.
As for the technical picture of GBPUSD, the growth and reaction to the retirement of the Truss quickly ended, which by the end of yesterday led the pound to the area of the opening level. Now buyers will focus on protecting the 1.1170 support and the 1.1240 resistance breakdown, which limits the upward potential of the pair. Only a breakthrough of 1.1240 will return the prospects for recovery to the area of 1.1290, after which it will be possible to talk about a sharper jerk of the pound up to the area of 1.1330 – yesterday's maximum. It is possible to talk about the return of pressure on the trading instrument after the bears take control of 1.1170. This will deal a blow to the bulls' positions and completely negate the prospects of the bull market observed since September 28. A break of 1.1170 will push GBPUSD back to 1.1120 and 1.1070.
As for the technical picture of EURUSD, the bears actively piled on the euro and returned everything to the side channel framework observed recently. To resume growth, it is necessary to return the pair above 0.9800, which will take the trading instrument to 0.9840 and 0.9870. However, the upward prospects will depend entirely on new US data and the decisions taken by the Federal Reserve System. A break of 0.9760 will put pressure on the trading instrument and push the euro to a minimum of 0.9720, which will only worsen the situation of buyers of risky assets in the market. Having missed 0.9720, it will be possible to wait for the lows to update around 0.9680 and 0.9640.
