Fundamental analysis

Markets betting on new British Premier Rishi Sunak

GBP buyers are clinging to the levels of their influence and the news which sets the stage for further strengthening of the pound sterling. So, the bullish outlook for GBP/USD seems realistic.

Yesterday, the news from London confirmed that the Conservative Party appointed Rishi Sunak as the third UK Prime Minister in the last four months. Experts say that he is taking office at a time of toxic arguments among the Tories. He won the victory when the domestic economy is facing the most serious upheaval over a few past years, including a contraction in economic growth, a protracted shortage of energy resources, and a feud among the ranks of the Tories. The Bank of England revived demand for government bonds, thus pushing yields of the benchmark 10-year Treasuries down to the lowest level in three weeks. It could indicate that the bond market might regain trust if Rishi Sunak takes over power. The recent actions of the British policymakers shook demand among investors. Therefore, the market is going to keep close tabs on any moves of the new British Premier, especially in terms of his fiscal policy.

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Yesterday, in his first public remarks as the new head of the government, Rishi Sunak urged his party to unite for the resolution of a grave economic problem. He expanded on a recession which has been already hurting the economy amid soaring inflation which is now measured in two-digit values. The latest PMI reports showed that business activity in the services sector shrank in October. This is another bad piece of news in light of weak retail sales released last week.

Meanwhile, households are struggling on the back of the cost-of-living crisis which is aggravated by sky-high utility bills. Prices of merchandise and services have been growing faster than wages. All in all, employees and households have less money available for spending on their needs. Their purchasing power has been waning. According to the latest survey, real income dropped roughly by 3% for the last 12 months.

In this context, Rishi Sunak has to adopt cautious fiscal measures to avoid another bust of turbulence in the bond market. The recent market jitters triggered by Liz Truss caused a sharp increase in bond yields that affected borrowing costs both for the government and for households and companies.

Another headwind is the energy crisis. Sky-high energy prices create problems both for factories and households. The government is due to withdraw financial aid in April 2023. So, the Britons and companies will have to survive. Some analysts foresee the worst-case scenario that inflation could reach 15% and higher unless the monetary authorities manage to push consumer prices down or the government passes a new relief package. Electricity bills for households might double in value, thus putting a great strain on incomes.

Under such economic conditions, GBP bulls welcome Rishi Sunak as the helm of the government.

As for the technical picture of GBP/USD, the pound sterling managed to stay afloat despite downbeat statistics yesterday. So, the sterling has a chance for further growth. Now the major task for the buyers is to defend the support at 1.1270 and break the resistance at 1.1340 which caps the upside potential of GBP/USD. Once the resistance of 1.1340 is broken, this will encourage GBP to recover to 1.1400. In turn, after GBP settles above it, we could predict a sharp increase to 1.1490 and 1.1540, the highest mark in a month. The currency pair will come under selling pressure only after the bears take control of 1.1270. This will destroy the bullish sentiment and cancel the bullish outlook for GBP/USD which has been valid since September 28. If 1.1270 is breached, GBP/USD will drop back to 1.1210 and 1.1140.

Discussing the technical chart of EUR/USD, the bulls asserted themselves yesterday. This price action subdued the bearish force. However, to enable a further climb of EUR/USD, the price should rebound to 0.9890 which will open the door to 0.9940. The thing is that the growth prospects will depend entirely on a report on US consumer sentiment. If 0.9890 is broken, the currency pair will come under selling pressure again. Hence, the euro could weaken to 0.9810. This will dampen the appetite for risk. In case the buyers miss 0.9810, EUR/USD might plunge lower to 0.9780 and 0.9740.

The material has been provided by InstaForex Company – www.instaforex.com


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