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The pair was holding around 1.1280 before Hunt’s statement came and right after, it pushed to a high of 1.1330. That came as the dollar also softened as risk trades extended gains but now we’re seeing a bit of a pullback in cable to 1.1270-80 levels again. One can argue that we already saw the bullish price action come into play at the start of the day but even so, the reaction here is rather tepid in my view.
So, what is next for the pound in this instance?
I think the main takeaway is that this whole political and finance crisis related to Trussnomics can be put to bed at least. That could see gilt yields pull back further but at the same time, it also means that the BOE is likely not needed to overextend and to do more by acting aggressively in order to address whatever policy missteps there might have been from the government.
The fact that Hunt also announced that the energy price cap will only last until April next year is a testament to that, in the sense that the government is now working more in line with the central bank.
However, when you look at where this puts us, it is basically a reset to September. What does that mean? It means that we are still looking at a position where the UK economy is still struggling to deal with high inflation, the cost-of-living crisis, an energy crunch and a pending recession that could last for up to a year.
That’s not exactly a pretty picture now, is it?
And when you consider that against the backdrop of a Fed that is still aggressively tightening and not letting up in terms of putting the pedal to the metal, the path of least resistance still seems for a move lower in cable.
In the bigger picture, we already got that corrective bounce from 1.04 to 1.15 in the past few weeks and so there is appetite for sellers to come back into the fray. All there is now is to watch for equities sentiment (indirectly dollar sentiment) as we look towards the central bank bonanza in the coming two weeks.
If there is a material breakdown to the levels pointed out here, expect another rush into dollars and broader markets to sell off again as it has done over the past few months.