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11.10.202200:47 विदेशी मुद्रा विश्लेषण और समीक्षा: GBP/USD. A fresh look at the pound. Parity is canceled

Exchange Rates 11.10.2022 analysis

The British pound managed to surprise with its fall to new record lows. A lot of new forecasts have appeared, according to which the exchange rate against the dollar should reach parity. Now, taking into account the corrected actions of the British authorities and the fresh look of analysts, the sterling can avoid the fate of the European currency, which not only reached parity with the dollar, but also deepened quite a lot lower.

At the beginning of the new week, the pound rose against the euro and remained stable against the dollar. This is because positive news on the UK financial front is on the horizon. In addition, the Bank of England announced the creation of a new mechanism to ensure the stability of domestic money markets.

What are the financial authorities talking about?

The Treasury should postpone the most important update of fiscal policy and the publication of independent economic forecasts to October 31, whereas earlier it was about November 23. The authorities are thus trying to convey to the markets ahead of time the fact that the government's economic program is reasonable.

However, the uncertainty of traders and investors regarding the financial prospects of Britain is likely to remain elevated for a long time.

Whatever it was, this kind of news was positively received by market players in the short term.

The release of forecasts in October instead of November reduces "uncertainty regarding the issue of gold coins. However, obtaining the cabinet's consent to cut spending and confidence in the postponement of the medium-term budget rule for a 5-year period make this decision delicate," according to economists from Panmure Gordon.

Ideas of the BoE

The central bank announced its intention to double the size of its daily emergency auction, at which it buys long-term government securities from 5 billion to 10 billion pounds.

A new mechanism has also been launched to provide the banking sector with the liquidity that its pension clients may need in the future.

By its actions, the BoE shows that it is attentive to signs of stress and will respond if necessary. This should reduce the degree of tension among investors regarding the safety of British assets.

The BoE is doing everything "possible to avoid a crisis of the pound," experts say. It is in disorderly markets that the pound is particularly susceptible to extreme fluctuations and increased volatility.

Recall that the pound was under the strongest pressure at the end of September amid the collapse of local bonds, which led to an increase in bond yields.

The exchange rate began to stabilize after the intervention of the BoE. At the beginning of the new week, the GBP/USD pair is trading above the 1.1000 mark, having recovered from the 1.0345 mark.

The pound rose to 1.1500 in the short term after the central bank's intervention in the gold market.

"We believe that failures in UK pension plans have led to some significant but temporary repatriation back to the UK in order to raise capital," Goldman Sachs comments.

In general, by its actions, the central bank sends signals that it will use considerable power to counteract instability in the markets.

Pound forecast

Budgetary changes remain key for the pound. ING expects GBP/USD to plunge below 1.1000 as downtrend risks remain high.

The downward movement will remain relevant, taking into account the further growth of the dollar against the basket of competitors. The pound will have to be tested for strength by macroeconomic reports.

Employment data will be the main event of the week. Unemployment is expected to rise again, but for now the BoE will view the situation through the prism of a shortage of workers. In November, the central bank may raise the rate by 100 bps.

Credit Suisse is waiting for a retest of the 1.0345 low.

Exchange Rates 11.10.2022 analysis

"Support is observed at 1.1057, then price support from the top of the base at the end of September at 1.0933. Below, as we see, it is necessary to give further impetus to the decline, and the next support is expected at 1.0786, then 1.0539 and, ultimately, the rate will go to a low of 1.0345," analysts comment.

Meanwhile, resistance is expected at 1.1186, and a return above 1.1227 is needed to get to a new resistance test at 1.1500. However, bears are definitely active here.

As for the long-term outlook of the pound, it is predicted that it should still avoid falling to parity with the dollar. At the same time, sterling will remain incredibly weak by historical standards, according to the latest Global Reach survey. The weakness will be clearly visible until the end of this year and early next.

Signs of the pound's recovery are noticeable at the moment, but there are no signs and reasons for further upward movement to the 1.2000 mark and will not be seen within the next year.

It will be possible to think about the restoration, and then with caution, from the middle of 2023.

Natalya Andreeva,
Analytical expert of InstaSpot
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