Pound US Dollar Exchange Rate News: GBP/USD Climbed on Mini-Budget Defenestration

October 17, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Climbed on Mini-Budget Defenestration

Pound (GBP) Recovered Modestly on Tax Measure Reversals

The Pound (GBP) remained buoyant after Chancellor Jeremy Hunt’s scrapping of most of the unfunded tax cuts in the mini-budget. Hunt replaced Kwasi Kwarteng as Chancellor on Friday, resulting in Kwarteng now the second shortest-lived Chancellor, having only held the position for 36 days.

Kwarteng’s calamitous mini-budget sent shockwaves through the market and sent the Pound plummeting to historic lows against the US Dollar. With confidence in the UK economy at rock-bottom levels, the U-turns of almost all the measures has created an upbeat mood in the markets. The Treasury has released a statement explaining that the ditching of the tax measures will raise £32bn. Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, claims that the move has brought some credibility back to the UK government. Further, the mini-budget reversal should allow the Bank of England (BoE) to raise interest rates higher. He added:

‘However, that credibility is still incredibly fragile and much of the government’s next moves will depend on the OBR forecasts being produced at the end of this month.

‘They won’t make for pretty reading but following this announcement should give investors some confidence that the UK’s finances are on a more stable footing.’

Meanwhile, capping any further gains for the Pound is the souring mood surrounding the UK leadership. After a brief press conference that saw Prime Minister Liz Truss only answer three questions from journalists, Truss appears to be on borrowed time. The return of political uncertainty will no doubt spook investors, as reports grow of more than 100 letters of no-confidence have been passed to the 1922 Committee.

With such a U-turn on policies that Truss herself believed in and acted on, many believe that without unified support or policies, Truss can no longer hold the PM position. With mounting pressure from within her own Conservative party, the sacking of Kwasi Kwarteng as her Chancellor, and now U-turns on almost the entire mini-budget, investors remain cautious the political volatility likely to endure.

US Dollar (USD) Undermined by Improving Risk Sentiment

Meanwhile, the US Dollar (USD) struggled to find much demand amid a strong recovery in global risk sentiment on Monday.

However, with potential economic headwinds looming on the horizon for the global economy, the US Dollar could enjoy a return of safe-haven flows. News out of China continue to weigh on market mood as Premier Xi Jinping stated that the country will not back down from its controversial and economy-stalling zero-Covid policy.

Recession fears are growing in the wake of Xi’s comments, as a doubling down on the policy could stall the world’s second largest economy if Covid outbreaks continue.

Elsewhere, the ‘Greenback’ could be propped up by a hawkish Federal Reserve. With rate hike expectations remaining elevated, the US Dollar is likely to remain relatively strong against its peers.

GBP/USD Exchange Rate Forecast: UK Hunt U-Turns to Inspire the Pound?

Looking ahead, the Pound US Dollar exchange rate could see further movement as the market continues to digest the mini-budget reversals.

Elsewhere, a lack of data could see the US Dollar move on market sentiment. Global recession fears and a persistent hawkish Fed could lend considerable support to the ‘Greenback’.

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