GBP: Hunt’s speech is a make-or-brake event for sterling

Expect another eventful week in UK markets. Prime Minister Liz Truss replaced Kwasi
Kwarteng with Jeremy Hunt on Friday as she scrapped the £18bn plan to avert a
corporate tax hike. Hunt will make a statement today outlining the measures he
plans to announce in his medium-term fiscal plan due on 31 October. Expect a good
deal of volatility around the announcement, as we suspect that general consensus
is that the fiscal U-turn will have a much larger scope than corporate taxes.
Quite crucially, today’s announcement by Hunt will coincide with the first day of gilt
trading without the support of the Bank of England’s temporary bond-buying
scheme, which puts even further pressure on Hunt to deliver a credible plan to fix
the UK’s troubled fiscal position. We still think there is a non-negligible possibility
that the BoE will at the very least have to postpone its plans to start quantitative
tightening at the end of this month on the back of continued instability in the gilt
market – even if this is primarily a reflection of Fed tightening and the global
backdrop more than domestic developments.
At the same time, there has been increasing speculation that Liz Truss may be
forced to leave by an increasing number of Conservative Party rebels. We should
get more clarity on this over the coming days; for now, Hunt’s announcement is
what truly matters for investors.
Data will also be in focus this week, with CPI figures on Wednesday expected to
show headline inflation at 10.0%, and the core rate at 6.4%. This should cement
bets on a 100bp hike by the BoE in November.
We continue to see elevated volatility in the pound and mostly downside risks
beyond any potential relief rally after today’s announcement by the new
Chancellor. We suspect anyway that the government will need to sound very
convincing in their fiscal U-turn to bring cable sustainably back to 1.15-1.20. Sub-
1.10 levels, also considering our call for a stronger dollar, remains our base case
scenario in the coming months.

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