If the BOE continues to tighten its monetary policy, will increase the chance of a tougher slump.
In the past few weeks, there were many talks about Mrs. Truss' economic plans, and finally, we saw some U-turn after pressures and criticisms from economists. The government in 10 downing street finally reversed the tax cuts that would primarily benefit the highest earners, as economic pressures increase on British households.
On the economic data front, after last week's optimist PMI numbers, Wednesday's GDP and production numbers disappointed the investors. Last week, UK Final Services PMI data for September exceeded expectations, reaching 50.0, compared to 49.2 in August. Construction PMI data was also higher than estimates, climbing to 52.3 in September from 49.2 in August.
This week so far, we had Employment numbers, GDP, and manufacturing production. On Tuesday, updated data from the labor market showed Claimant Count Change, which measures the change in the number of unemployed people in the UK, raised to 25.5K, while last month it was 1.1K. However, the unemployment rate declined to 3.5% in August from 3.6% in July. The warning number was the Average Earnings Index +Bonus which rose by 6%, which means inflation can still increase. On Wednesday, we had GDP and manufacturing production numbers. GDP fell by -0.3% monthly, and manufacturing production reduced by -1.6% in August. Overall, economic data show weakness in most sectors.
On the other hand, the announcement of the new government’s first ‘mini-budget’ by British Chancellor, Kwasi Kwarteng, including substantial tax cuts and energy subsidies was met with skepticism by markets, and the Sterling tumbled. The budget including major tax cuts will lead the government to have more borrowing, while the country is facing a debt crisis.
After severe criticism from the government, the BoE had to resort to a new bond-buying program, to restore order to markets. However, recession concerns are weighing the currency down. While the BoE warning that recession can hit the UK in the fourth quarter of this year, and is forecasted to last for five quarters, until the end of 2024 with GDP falling to 2.1%, the new prime minister's plans have no sign of optimistic, which can again increase the pressure on Sterling and London Stock markets.
The Bank of England raised its interest rate by 50 bps in its latest meeting, bringing the total interest rate to 2.25%. If the BOE continues to tighten its monetary policy to bring inflation under control, It may help control the inflation but can increase the chance of a tougher slump.
From the technical point of view, Cable in the H1 and H4 charts returned to the uptrend. In long-term charts, as you can see in the bellow Daily chart of GBPUSD, currently it is trading at its 20 DMA at 1.115. The main resistance at the moment sitting at 1.140, and breathing above this level can change the market sentiment, otherwise, trading under 1.140, means the continuation of the downtrend.
