Liz Truss Announced as Next UK Prime Minister, GBP Unchanged

[MongiIG]

GBP/USD, EUR/GBP ANALYSIS AND TALKING POINTS

• Liz Truss Announced as Next UK Prime Minister
• No More Fiscal Policy Vacuum to Weigh on GBP

Liz Truss has been announced as the next UK Prime Minister with 57% of party votes and will be the third PM in six years. In terms of proceedings, Liz Truss will officially become Prime Minister tomorrow, providing a speech Tuesday afternoon.

This will offer some good news for the Pound now that the UK will be out of this fiscal policy vacuum. In recent weeks we have seen UK government bonds and the GBP sell-off aggressively (maybe part of this reflects political risk premium being priced in), which is similar to how an EM currency would trade. That said, over the weekend, UK press reports noted that Liz Truss is considering freezing energy bills. Allies say to expect a shock and awe moment to tackle the cost of living crisis. Elsewhere, Liz Truss has also clarified her stance on the Bank of England, reaffirming the importance of their independence and rowing back some of her tough rhetoric around BoE reforms.

As such, now that fiscal policy measures are just around the corner, the period of GBP underperformance may have peaked for the time being. Consequently, while GBP sentiment is through the floor, there is perhaps a case for a modest mean reversion in GBP crosses, particularly against the Euro as opposed to the USD as it is difficult to bet against the greenback. A reminder that last week saw the largest weekly rise in EUR/GBP since May.

On the technical front, key topside hurdles are situated from 0.8670-0.8720. Meanwhile, rate differentials also point towards lower EUR/GBP. The view of lower EUR/GBP would be reassessed should the cross break above 0.8730-35.

EUR/GBP CHART: WEEKLY TIME FRAME

 

Sep 5, 2022 | DailyFX
Justin McQueen, Strategist

[MongiIG]

Pound Forecast: GBP Buoyed by New Prime Minister Optimism

POUND STERLING: EUR/GBP, GBP/USD ANALYSIS

• New prime minister has her work cut out for her – inflation, energy and economic contraction
• EUR/GBP update: Bullish fatigue sets in as GBP attempts recovery. ECB on Thursday
• GBP/USD bounces off low on new PM optimism

 

 

NEW PRIME MINISTER INHERITS A MASSIVE UNDERTAKING

A number of recent developments have helped the pound bounce from its lows but the idea of a sustained bullish move is a tough one to get behind.

Markets appear to endorse with the appointment of Liz Truss as leader of the ruling conservative party, who is to be officially appointed as the UK’s new prime minister later today. The pound has mounted some resistance against what an awfully long period of sterling declines with very little good news on the horizon.

Truss ran a campaign that made strong promises to support households through this time of soaring inflation with tax breaks cited as one of the mechanisms of easing the current cost of living crisis. Reducing taxes appears attractive in the short-term but has concerning long-term implications like a sustained level of high prices due to people have greater disposable income. The UK has also watched its debt-to-GDP ratio go from 80% before the pandemic to nearly 100% as a result of pandemic-related stimulus.

Nevertheless, UK citizens are anticipating an 80% rise in household bills this winter meaning Truss’ plans to freeze household energy bills for 18 months couldn’t come at a better time. In addition, the new prime minister has further plans in the region of 40 billion pounds to assist businesses with rising energy costs. Therefore, the promises of relief to households and businesses is likely to support the pound in the short-run but the major issues of inflation (10.1%) and the anticipated recession will provide an uphill battle for the newly formed government and the pound.

 

Full article: Sep 6, 2022 | DailyFX
Richard Snow, Analyst