Weekly FX Review - 11 October

GBP/USD – Weekly

The weekly chart shows how the British pound has had a very poor year overall, dropping from 1.40 to 1.10. The press continues to highlight the UK mini budget as the catalyst for much of the pound’s weakness. However, it is clear the situation has been negative for a great deal longer than that.

GBP/USD - Daily

The daily chart details how price action has now recovered from the recent “flash crash” following the mini budget.

However, the longer-term negative trend appears to have regained control. These breeds concern that, without a significant policy shift, the pound may continue to drift down to parity.

Talk has increased of a possible emergency rate hike by the Bank of England. Such a hike would ease the longer-term negative trend for a while. But doubts would remain on how much room the authorities have here in the UK to get aggressive on rates compared to the Fed for the long term.

The UK residential mortgage market is far more exposed to interest rate moves than the US, as the UK mortgage market has many householders with only 2-5 year fixed rates, compared to the 20 years or more commonplace in the states.

This means even small rate rises here have an amplified impact on consumer spending. Without this major effect we could have expected the BoE to have moved higher by now.

The 1.1000 area has managed to hold the price action in recent days, but the longer-term skew remains negative on the pound. Even an emergency hike would only be expected to ease the situation for a while. You can expect many to adopt a ‘sell on rallies’ stance in the days ahead.