The historic fall of Sterling

Head of Research

Sep 26, 2022

The chancellors mini budget driving the selloff, how low can she go? Selling in the overnight Asian session on Monday the 26th of September 20022 resulted in Sterling against the US dollar trading to levels last seen 37-years ago. The 1985 low was 1.0520, a previous all-time base. Pepperstone registered a base of 1.0353 this morning. A new historic low print for cable (GBPUSD).

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 (27^th 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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