EUR/GBP update: As the pound makes a comeback, bullish sentiment begins to wane. On Thursday, ECB. The challenges facing the next prime minister include inflation, oil prices, and a slowing economy. GBP/USD recovers from the trough due to fresh PM optimism.
A HUGE UNDERTAKING PASSES TO THE NEW PRIME MINISTER
The pound has recovered from its lows thanks to a number of recent events, but it’s hard to support the notion of a long-term positive trend.
The nomination of Liz Truss as the head of the conservative party, who will formally take office as the next prime minister of the UK later today, seems to have the support of the markets. With virtually little positive news on the horizon, the pound has managed to hold its own against what has been an extraordinarily extended stretch of sterling falls.
With tax breaks mentioned as one of the strategies to ease the present cost of living issue, Truss launched a campaign that made bold pledges to help people during this period of skyrocketing inflation. Tax cuts may seem appealing in the short run, but they might have negative long-term effects, such as high prices that persist because more people have discretionary cash. The UK has likewise seen its debt-to-GDP ratio increase as a consequence of pandemic-related stimulus, from 80% before to the epidemic to over 100%.
Truss’ promises to freeze family energy costs for 18 months, however, couldn’t come at a better moment given that UK residents anticipate an 80% increase in household bills this winter. The next prime minister also has further proposals worth up to 40 billion pounds to help companies cope with increasing energy prices. Therefore, the short-term support for the pound is expected to come from the promises of relief for individuals and companies, but the big problems of inflation (10.1%) and the impending recession will make life difficult for the newly elected administration and the pound.
BULLISH FATIGUE SETS IN AS GBP ATTEMPTS A RECOVERY: EUR/GBP UPDATE
According to a scenario described in yesterday’s post, the pound has risen against the euro, breaking above the 0.8599 level of the 23.6% Fibonacci retracement of the significant 2022 move. The cluster of lengthy upper wicks in the area of resistance around 0.8660-0.8680 was the telltale sign of a likely bearish reversal in the pair.
The 38.2% Fib (0.8523) and the psychological level of 0.8500 are the next levels of support after the price movement has moved below 0.8595. The European Central Bank is expected to raise interest rates on Thursday by 50 or 75 basis points, which, surprisingly enough, may not be enough to strengthen the euro in the eyes of the markets. Even a sizable increase might be seen as too little too late since other central banks have raised rates much more than the ECB has. Any hint of a terminal rate hike that has been agreed upon might calm the markets, but this would need the support of all rate setting committee members.
Resistance is seen around 0.8595/0.8600, although this might just be a pullback before a further decline. If we trade above 0.8680, which is above the previous upper wicks, the bearish reversal seems to be invalidated.
Daily EUR/GBP Chart
GBP/USD IMPLIFIED BY NEW PM OPTIMISM FROM LOW
If we end today’s trading session in the green, cable will have gained two days in a row. This comes after six straight days of losses as the pound was ignored in favor of the dollar’s ascent to new heights. GBP/USD is nearing and rebounding off the pandemic low of 1.1420, suggesting that it is trying to retrace the longer-term trend. Prior to the psychological 1.2000, which is, obviously, a long way off, the next level of resistance is at 1.1685. The pound continues to experience headwinds, casting doubt on a positive turnaround.
Daily GBP/USD Chart