Pound returned to its downward move, Gilt concerns continue

Pound returned to its downward move, Gilt concerns continue
Analysis
Ahura Chalki
Author:
Ahura Chalki
Published on: 05.10.2022 17:03 (UTC)
Post reading time: 1.96 min
207

Investors ignoring Truss's speech and commitments! 


Wednesday and in continuing the efforts of the past few weeks, the UK prime minister tried to explain her strategy and policies in a clear speech to the Conservative Party’s annual conference. according to many economists, her earlier published plan was questioning the independence of the central bank; therefore she backed off from some of her plans and comments. However, she repeated her commitment to lower the tax, which was ignored by investors and economists, as she did not give corresponding detail about how her tax cuts will be funded. 


After her speech, the benchmark 10-Year yield rose 14 basis points to 4.00%. Soaring borrowing costs and the largest outflows from the UK stock market on record (and the seventh consecutive year of outflows since the Brexit referendum) still have their pressure on the Sterling. Despite the Bank of England's swift intervention and temporary stabilization, alarm bells appear set to be sounded. 


Last week, BOE announced a new bond-buying program to restore order to markets and buy long-dated gilts, which have been strongly affected by repricing. However, as you can see in the below chart, it was not good enough to lift the Cable above its key pivot point. Another reason for last week's sterling weakness was BoE's less hawkish act, by delivering a lower-than-expected rate hike. At the beginning of last week, with BoE Governor Andrew Bailey's comments, the pound got some support, as he told that BOE would not hesitate to change interest rates if needed. However, when it became clear that there would be no emergency intervention, the pound fell to the new all-time low again.  


UK economic outlook remains weak, with high inflation and rising recession concerns, which now become more concrete with concerns seen in the most developed economies. BOE also has warned that recession is expected to hit the UK economy in the fourth quarter of this year, and is forecasted to last for five quarters, until the end of 2024 with GDP falling to 2.1%.


From the technical point of view, after a short move above 20-DMA, now it is trying to get back under 1.1285 (20-DMA), anyway, if Cable can hold its slow recovery, the next resistance sits at 1.146 level and higher up near 1.173, while support may be found at the new all-time low of 1.035. 


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