Bank of England Chief Economist Huw Pill stated that the BOE is ready to make a strong policy response at its November 3 policy meeting, in a bid to calm the battered UK bond market and Sterling. The comments helped prop up Sterling and saw it recover from record lows against the Dollar and Euro, which were hit during Monday’s massive sell-off.
As investors demand higher compensation for holding on to UK government debt, the recent decline in the value of the Pound has been accompanied by an increase in UK bond yields. The yield on the 10-year gilt on Tuesday hit an almost 14-year high of 4.537%. This demand comes in response to last Friday’s tax cut announcement from Chancellor Kwasi Kwarteng.
There are growing fears that the world economy will enter a recession, amid tax cuts and guarantees that billions of pounds of energy prices will be paid for by issuing more debt.
The BOE is committed to bringing inflation back to 2.0% and will raise interest rates to slow the economy down. In light of rising inflation expectations, the market is now pricing in a 200bp hike over the rest of 2022.
Meanwhile, the EURGBP exchange rate remains vulnerable amidst a deteriorating global backdrop largely a result of rising US interest rates. Rising interest rates have increased the cost of money globally, reducing borrowing and economic activity. Falling stock markets and commodity prices are evidence of this slowdown, as is the soaring US Dollar. This unhelpful backdrop is likely to keep UK assets under pressure and Sterling will struggle longer.
EURGBP’s intraday bias remains neutral at the moment. The latest rally to 0.90 area turn the 0.8720 resistance into support. A move above 0.9250 will target the 0.9500 long term resistance. However, a break of the 0.8270 support will cloud the near-term outlook. For now, trading within the range is likely to remain in force and the 0.9000 round figure mark will be the middle price traders are watching.
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Ady Phangestu
Market Analyst – HF Educational Office – Indonesia
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