GBP: BoE holds government toes to the fire

One cannot help but think the Bank of England (BoE) has played the poor hand it has been given quite well in potentially forcing the government into a U-turn on fiscal policy. There is no confirmation of such a policy shift yet, but no doubt Twitter will nearly break today on speculation of a shift in policy or personnel. Central bank independence is hard won and the BoE has clearly not wanted to succumb to accusations of government financing. GBP/USD continues to trade on a super-high one-week realised volatility near 20%.

We suspect that GBP/USD may struggle to break the 1.15 area. Will it trade back to 1.20, where it was before fears of a Liz Truss government started to hit the Gilt market? Probably not. Equally, EUR/GBP was trading at 0.84 in early August and we would say the political risk premium and a difficult external investment environment will make it hard for EUR/GBP to sustain a move under 0.8550/8600.

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