Pound soars after Kwarteng U-turn

GBP/USD is up for a sixth straight day. In the North American session, the British pound is trading at 1.1272, up 0.94%.

It was quite the ride for the last week, as it traded in a 500-point range and touched a record low of 1.0359. The pound clawed its way back and ended up gaining 2.9% on the week. The unusually sharp volatility has extended into this week with the pound posting strong gains.

Kwarteng abolishes tax cuts

Mini-budgets are usually tame affairs, but not this time. Chancellor Kwarteng’s tax cut package for high earners was an unmitigated disaster, which caused turmoil in the financial markets, sent the pound reeling and forced the BoE to step in with an emergency bond bailout. The tax cuts were hastily withdrawn today, even though Prime Minister Truss said on Sunday that she was committed to the plan. Clearly, the pressure was too much and Kwarteng had to make a humiliating u-turn. The pound has risen sharply today as a result.

Speaking of u-turns, the Federal Reserve may make a U-turn in rate policy by the end of the year, depending on the strength of the economy and which way inflation is headed. The data can be conflicting, which was the case on Friday. The Fed’s preferred inflation indicator, the Core PCE Index, rose 4.9% in August, up from 4.7% in July and above the consensus of 4.7%. At the same time, the University of Michigan sentiment index showed that inflation expectations for 5-10 years ticked lower to 2.8%, down from 2.7%. In the meantime, the Fed’s hawkish stance has fuelled the US dollar’s upswing, and with the Fed expected to deliver at least one more oversize rate before the end of the year, the outlook for the US dollar appears bright in the short-term.

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GBP/USD Technical

• GBP/USD has support at 1.1144 and 1.1052
• There is resistance at 1.1265 and 1.1384

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