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.