FX.co ★ Pound: confident steps towards recovery and caution in advancing

The British currency is gradually strengthening its positions, recovering from the recent decline. At the same time, the GBP is cautious in its movements, as it fears another trick from the USD and a deterioration in the geopolitical situation. Experts assess the chances of the pound's growth in the short term as moderately positive.

On Monday, October 17, the sterling strengthened significantly after the intervention of British Prime Minister Liz Truss, in the previous plan of economic support for the country. Recall that last Friday, October 14, she canceled some points of this plan and fired Finance Minister Kwasi Kwarteng, saying that from April 2023, UK corporation tax will increase to 25% instead of keeping it at 19% under the original mini-budget approved by the government. Note that the increase in corporate taxes to 25% applies to profits over 50,000 pounds.

Kwarteng was replaced by Jeremy Hunt, the former Minister for Foreign Affairs and Health of Great Britain. According to the official, he is ready to return the "economic authority of the country", making every effort for this. Against this background, the sterling has risen in price by 0.6%, reaching 1.1245. Last Friday, October 14, the pound was supported by a short-term decline in the dollar. This allowed the sterling to rise from the current lows, but did not completely solve the problem. On Monday morning, October 17, the GBP/USD pair was trading at 1.1266, trying to gain a foothold in its current positions.

The focus of traders and investors is the further dynamics of the UK government bond market. It is important for players to assess its prospects and understand how trading will take place after the Bank of England curtails emergency support for the national government bond market. According to a number of investors, the actions of Truss are not enough to restore confidence in British assets. Recall that due to serious economic problems, the British government will continue to raise corporate tax in 2023.

In such a situation, the pound will have to defend its positions, trying not to slide into a downward spiral. Currency strategists at Commonwealth Bank of Australia are confident that the GBP will "remain very volatile" this week. Negative factors for the pound are distrust of the new UK government and concern over an overly aggressive rate hike by the BoE. According to analysts, such actions will pull the British economy into recession. Against this background, in the medium term, "the path of least resistance for the British currency is to decline."

Recall that at the end of last week, data on UK GDP for August were published, which turned out to be worse than expected. According to experts, this indicates a gradual immersion of the British economy into recession. According to reports, after a slight growth (by 0.1% in July), the country's economy contracted by -0.3% m/m. By the end of this year, experts expect a significant reduction in UK GDP. Earlier, at the end of the summer, the BoE warned about the risk of a recession. According to preliminary estimates, it will begin in the fourth quarter of 2022 and last for another five quarters. This factor puts downward pressure on the pound, experts emphasize.

According to experts, market participants are set to tighten the UK's fiscal policy in order to combat skyrocketing inflation and rising interest rates. However, political and economic uncertainties remain constraining factors in this matter. At the same time, experts fear that the current growth of sterling will be short-lived, and its stability will turn out to be "a colossus with feet of clay."