Beijing time on Tuesday (October 18) in early Asian trading, the US dollar index fell slightly and is currently trading around 112.08. As the British government announced the cancellation of the tax cut plan, the safe-haven demand in the market fell significantly. On October 17, the pound jumped and the dollar index fell sharply. Investors were also eyeing whether the Bank of Japan would intervene as the dollar hit another 32-year high against the yen.
Britain’s new Chancellor of the Exchequer Jeremy Hunt issued a statement on October 17 saying that “almost all” tax cuts in the large-scale tax reduction plan announced by the government in September this year will be cancelled to ensure the stability of the British economy and strengthen the outside world. confidence in policy.
This news significantly eased the market’s concerns about the UK economy and market volatility, and the market’s demand for safe-haven fell significantly, putting the dollar under significant pressure.The U.S. dollar index closed down 1.05 percent at 112.10 on Monday, just shy of a 20-year high of 114.78 set on Sept. 28.
St. Louis Fed President Bullard said on Saturday that the U.S. dollar was strengthened by the Fed’s rapid rate hikes, but that could ease once the Fed reaches a point where it pauses rate hikes.
Adam Button, chief currency analyst at ForexLive, said: “The pound has been the driver of the FX market so far this month, with the big reversal announced by the UK government restoring confidence in the pound and taking away dollar buying.”
After the news, the price of British government bonds rebounded sharply. Hunter replaced Quatten, whose unfunded tax cut proposal on Sept. 23 sparked a rout in bond markets. Chris Beauchamp, chief market analyst at IG, said: “For now, the market seems happy to give the new chancellor time and space to sort out the mess in government.”
Sterling touched 1.1439 against the dollar on Monday, its highest since October 5, before closing up 1.63% at 1.1358.
Marc Chandler, chief market strategist at Bannockburn Global Forex, said the pound could bottom when it hit a record low of 1.0327 on Sept. 26, a move he called “exaggerated.”He added that the next major resistance level for GBP/USD is at 1.15。
Sterling rebounded against the dollar on Monday, but the rebound was still limited, and finally closed up 1.63% at 1.1358. Cooling expectations for a rate hike by the Bank of England, political turmoil and a recession are the bears facing the pound.
Traders lowered bets on a rate hike by the Bank of England, which is expected to peak at 5.36% by May next year.
Britain faces a nine-month recession as energy prices and inflation hit businesses and households, economists at the Ernst & Young ITEM Club, an independent Treasury economic model, have warned.The UK economy is already shrinking and will continue to decline until the middle of next year.
The group expects GDP to grow by 4.3% overall this year and contract by 0.3% in 2023. The chief economic adviser said price pressures should subside over the next two years, especially as the government’s energy plans are limiting the extent of inflation this winter. On the other hand, factors driving stronger inflation are the weaker pound and the expected tax cuts in the mini-budget. However, these factors are not expected to prevent inflation from falling back below the BoE’s target over the next two years. Meanwhile, a Deloitte survey showed a more than three-quarters chance of Britain falling into recession next year.
British MPs will submit a letter of no confidence in Truss to 1922 committee chairman Graham Brady, but Brady opposes the matter, arguing that the new chancellor Hunt and Truss should have a chance in October, according to The Times. The economic strategy is set out in the 31st budget. On the other hand, some MPs have had secret discussions in this regard and are considering replacing Truss with another leader. This will be the fifth change of prime minister since Brexit. Truss had previously pledged to repeal the tax, but the failure to achieve the goal sparked dissatisfaction within the party.
In addition, the survey showed the party trailing Labour in the polls. But Truss may not be ousted, with many leaders and ministers opposed to the move. “A change of prime minister would be a disastrously bad idea, not only politically but also economically, and we will absolutely continue to focus on growing the economy,” the foreign secretary said.
On October 17, European Central Bank Governing Councilor Joachim Nagel said that the European Central Bank must continue to rapidly reduce monetary support and cannot stop raising interest rates prematurely. His comments boosted the euro, which closed up 1.19% at 0.9839 against the dollar on Monday. However, the risk of economic recession remains a headwind for the upside of the exchange rate.
The IMF predicts that with the advent of the energy crisis, the euro zone economy will fall into recession in the second half of 2022, and European Central Bank Governing Council Martins Kazaks also acknowledged that there is a risk of economic downturn.
Kazaks said he would be “overjoyed” if the ECB’s new forecast in December did not include a recession. The only question now is how long and how severe the recession will be, which will determine the path of monetary policy.
On October 17, ECB Deputy President Guindos said that the possibility of a technical recession in the euro zone cannot be ruled out.. The ECB does not target exchange rates, but it does consider exchange rate issues.
Traders were also eyeing any Bank of Japan intervention, with dollar-yen hitting a 32-year high of 149.08 on Monday before closing up 0.19% at 149.03.
Japanese authorities intervened last month to buy the yen for the first time since 1998, after the Bank of Japan insisted on maintaining a policy of ultra-low interest rates, which has hit the yen this year.
Following last week’s decline in the yen and a meeting of global financial leaders, Japanese authorities continued to warn markets on Monday, claiming they will respond forcefully to the yen’s rapid decline. Global financial leaders acknowledged currency volatility at the meeting.
Key data and outlook for Tuesday
Big things to watch on Tuesday: Reserve Bank of Australia’s monetary policy meeting minutes, US President Joe Biden’s speech.
In addition, investors also need to pay attention to the Beige Book of economic conditions released by the Federal Reserve on Thursday (October 20).
Summary of Institutional Views
1. MUFG is bullish on the dollar
① Derek Halpenny, head of global markets, EMEA and international equity research at Mitsubishi UFJ Financial Group (MUFG), said: “We are now more confident that the Fed will continue to accelerate rate hikes for the rest of the year;”
②Halpenny wrote in a research briefing last Friday afternoon: “The hawkish repricing of Fed rate hike expectations and heightened fears of a global hard landing support our expectations for further dollar strength.”
2. Commonwealth Bank of Australia: Before 1.0705, there is little technical support for GBPUSD
① Joseph Capurso, head of international economics at the Commonwealth Bank of Australia, pointed out that the new British Chancellor of the Exchequer, Hunt, said that further adjustments to the mini-budget will be made in the coming weeks;
② If Hunt’s reforms fail to reach the level needed, GBP could fall sharply; GBP/USD has little technical support until 1.0705
3. National Australia Bank: Still cautious on sterling
Rodrigo Catril, strategist at National Australia Bank, said: “One view is that things are already very bad for the pound; we remain cautious – Hunter in charge of the Treasury is good news for the pound in the short term, but the Conservative Party is deeply divided”
4. MUFG: Sterling could be sold further
①Mitsubishi UFJ foreign exchange analyst Lee Hardman said that this week is expected to be another turbulent week. Obviously, he thinks Monday will be primarily a major test of the UK government bond market;
②The new Chancellor of the Exchequer Hunt has a “different way of thinking” from Quatten, but the pound may be sold off further in the coming weeks ahead of Hunt’s October 31 financial report
5. Crédit Agricole remains bearish on the pound
①Valentin Marinov, head of foreign exchange strategy at Crédit Agricole, said: “Even if the UK government makes a U-turn on its growth-promoting agenda, imposing a windfall tax on low-carbon energy producers to give some of the cost of living measures to provide funding, which will also not change our negative outlook for sterling;”
②Marinov and colleagues wrote in market commentary: “According to our foreign exchange ranking based on factors such as relative growth prospects, external imbalances, real interest rates and yields, the pound remains the worst currency in the G10”.