Early volatility eases, but GBP remains at risk as we await BoE reaction

Kwarteng’s plan to lift the economy appears to have fallen flat, although the pound has at least found support on the premise that the Bank of England could be about to act.

Prospect of emergency action from the BoE helps reverse early GBP collapse

“The pound has been on a rollercoaster ride today, with GBPUSD experiencing the highest one-day volatility since the height of the Covid crisis (March 2020). With Truss and Kwarteng in the job for less than a month, the past week has been a swift reminder that they have very little room for mistakes when seeking to implement a whole raft of fiscal policies. While Rishi Sunak managed to guide the UK through the Covid crisis thanks to novel policies such as the furlough scheme, Kwarteng seems to be willing to ramp up debt to the benefit for the 1%. The strength of the pound may be a reaction to the anticipated emergency rate hike from the Bank of England, but the risk here is that markets begin to realise the UK’s reserves make defending the pound increasingly difficult. ”

Markets regain ground, but optimism will remain in short supply 

“US markets have helped lift a somewhat tense mood in Europe, with the likes of the FTSE 100, and DAX following the lead of US stocks. Interestingly, we have seen the tech-focused Nasdaq leading the US gains as investors pile in to growth stocks despite fears around rising rates at the Fed. In the UK, the Chancellor’s generous budget giveaway may not be as useful as he makes it seem, with the Bank of England expected to combat the subsequent inflation and sterling decline by hiking faster and higher. Between Russia threatening nuclear war, the pound trading like a emerging market currency in crisis, and Europe preparing for a rough winter, it is safe to say that any short-term bounce in stocks should be treated with a generous sprinkle of salt.  ”