GBP/USD drops as UK PM sacks Chancellor Kwarteng

The GBP/USD was down about 130 pips on the session at the time of writing on Friday afternoon. This comes after under-pressure UK Prime Minister Liz Truss sacked her also-under-pressure Chancellor, Kwasi Kwarteng. There were lots of rumours on Thursday that this would happen, which saw the cable and FTSE stage a relief rally. But now that the news has been confirmed, the GBP/USD has reacted in a very typical way: down. In other words, it was a case of buy the rumour, sell the news for the cable.

What’s next?

The market will be asking lots of questions. Who is Kwarteng going to be replaced by? What changes will the new Chancellor bring to the mini budget? All these changes and the U-turns within the first month of the new PM Liz Truss’s reign raises serious question marks about her longevity in the job, and even raises the prospects of a general election.

So, in addition to everything else, there is the added political uncertainty hanging over the economy, which is not going to benefit anyone.

But there is arguably an even larger elephant in the room…

The Bank of England’s temporary bond buying is going to end today. What will this mean for borrowing costs, and mortgages… and by extension the pound and FTSE? In short, lots of uncertainty, which means more downward pressure.

BoE, what you gonna do?

As mentioned, the Bank of England’s temporary bond buying is going to end Friday. We are already seeing renewed selling of the pound while the FTSE has started to come off its highs after rallying sharply on Thursday, in reaction to the news of Kwarteng’s sacking.

With the BoE no longer going to be purchasing long-dated bonds, will we see yields start to head higher again?

The US dollar is continued to apply pressure on the GBP/USD, after a stronger CPI report raised expectations for more rate aggressive rate increase from the Fed.

In the UK, the political turmoil and a near 10% inflation rate means consumer and business budgets will continue to get stretched as we head towards the winter months.

Unless the new Chancellor cuts back on the government’s expected spending plans sharply, there is a risk that bond yields will rise further.

In any event, don’t expect yields to go down sharply and soon. The BoE has to keep on hiking interest rates because of the very high inflation rate. This should keep bond prices under pressure and yields underpinned.

UK CPI in focus on Wednesday

After edging back below 10% in August, CPI is likely to have remained elevated in September due to the latest slump in the pound, which has surely boosted the price of imported goods further. If CPI doesn’t come down sharply, the pressure on the BoE will grow even more. Aggressive rate hikes to bring CPI down will only boost bond yields further, raising borrowing costs for the government and households alike.

What does it all mean for GBP?

Well, you can argue that much of the risks to the UK economy has already been priced in. But the political and economic situation keeps on going from bad to worse. Yields could rise alarmingly again if CPI beats and the BoE refuses to step in again to depress rising borrowing costs. Against this backdrop, the path of least resistance remains to the downside for GBP/USD.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

FOREX.com is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment and CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.forex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.forex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 42.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.

Delayed London Stock Exchange (LSE) Data

The London Stock Exchange (LSE) market data displayed or referenced on this website is provided on a delayed basis and is not in real time. The delay period may vary but is typically at least 15 minutes. This data is intended for information purposes only and should not be relied upon for trading, investment, or other financial decisions. We do not guarantee the completeness, reliability, or suitability of the data for any particular purpose. Users should consult real-time data sources and obtain professional advice before making any financial decisions.