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September 28, 2022

Historic Peril for the Pound

Michael J. Donoghue
Historic Peril for the Pound

A strange series of events recently sent the United Kingdom’s Pound Sterling tumbling to historic lows. Just weeks after the death of Queen Elizabeth II (a head of state who was uniquely well-liked among the UK’s population by contemporary standards) Kwasi Kwarteng, Britain’s new chancellor in recently appointed Prime Minister Liz Truss’ administration, issued a fiscal statement on the 23rd of September. Paramount for this economic agenda are subsidies to provide price caps for devastating energy costs, along with an array of tax cuts, especially for high income earners. The plan, which would require extensive debt financing to execute (over 1.5% of GDP per year for the tax cuts), prompted GBP/USD to plummet past 1985's lows, briefly falling below 1.04 for the first time in history. This historic peril for the Pound has since been stabilized via emergency bond-buying intervention from the Bank of England (BoE).

Is GBP/USD Parity Possible?

Some analysts appear to be speculating that the Pound will fall to parity with the US Dollar, which does reflect overall institutional sentiment as per the latest COT data. Judging from the aforementioned recent developments in fundamentals, e.g., a UK government aiming for fiscal stimulus through deficit spending and a BoE that is startlingly willing to provide dovish monetary stimulus, the Pound is primed for further weakness. These efforts to restore growth to the UK’s economy while inflation hovers at 40-year highs seem comparable to fighting a fire with gasoline; thus, a continued poor performance from the Pound is plausible. EdgeFinder analysis appears to corroborate these biases, as shown in these two pairs with their respective signals and ratings.

1) GBP/USD (Receives a -6, or ‘Strong Sell’ Signal)

Historic Peril for the Pound
Historic Peril for the Pound

After finding concomitant support between the bottom trendline and 1985's previous record low, price action has rallied. Selling pressure could resume upon touching resistance from the upper trendline, moving average(s), or Keltner Channel walls.

2) GBP/JPY (Receives a -5, or ‘Sell’ Signal)

Historic Peril for the Pound
Historic Peril for the Pound

Similarly to GBP/USD, after briefly touching support around the 149 level, price action is currently retesting the upper zone as resistance.

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