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The latest selloff was triggered by the new UK chancellor, Kwasi Kwarteng’s mini-budget last week. The spending measures and tax cut have hit confidence in the pound with the chancellor pledging more cuts this weekend.
The UK bond market reacted aggressively with the 2-year government bond yield driving (GB02Y) over 4.5% this morning.
Figure 1 Trading View GB02Y 26/09/2022
Will the Bank of England intervene?
With some analysts now calling for the next move in GBPUSD being towards parity (1.0000), will the Bank of England intervene to save the pound?
Chris Weston, the head of research at the brokerage firm Pepperstone, said the pound was “the whipping boy” of the G10 foreign exchange market, while the UK bond market was “getting smoked” thanks to Kwarteng’s £45bn debt-financed tax-cutting package.
“Investors are searching for a response from the Bank of England. They’re saying this is not sustainable, when you’ve got deteriorating growth and a twin deficit.”
“The funding requirement needed to pay for the mini-budget means either we need to see far better growth or higher bond yields to incentive capital inflows,” Weston said.
A look at GBPUSD
GBPUSD
Traders have ‘bought the dip’. At the time of writing, all the initial overnight selloff has been recaptured. Will we see some follow through bullish momentum in GBPUSD? A daily close above or close to 1.0849 tomorrow (27th of September) would form a bullish Morning Star pattern. This formation is often seen at the base of a trend.
Figure 1 Trading View GB02Y 26/09/2022
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