GBP: not out of the Tory woods yet

GBP/USD traded in a remarkable 10-big-figure range last week after hitting a
record low last Monday but ultimately recovering to levels from before the release
of the UK mini-budget on 24 September. The wild gyrations reflected the ebb and
flow of investors’ GBP sentiment that ranged from utter despair in the immediate
aftermath of the mini-budget announcement to cautious optimism that reason will
prevail more recently. Indeed, investors are hoping that the Truss government may
backtrack on some of its spending plans when faced with soaring borrowing costs,
collapsing support for the Tory party in the polls and growing opposition inside the
Tory party itself. It further helped the GBP that the BoE intervened aggressively to
prevent meltdown of the gilt market. Last but not least, the GBP has been looking
excessively oversold and undervalued recently, and this likely aided the recent
recovery. All that being said, we maintain a cautious outlook on the currency from
current levels. In particular, it remains to be seen whether the violent market
reaction and the drop in opinion polls can sway the Truss government to change
its approach. FX investors will be closely monitoring speeches by Chancellor Kwasi
Kwarteng today and PM Liz Truss on Wednesday at the Tory party conference,
looking for any indication that debt sustainability and financial stability have now
become priorities for the government. In addition, the market will eagerly await the
still-to-be confirmed publication of the preliminary OBR assessment of how the
government fiscal stimulus impacts the economy and the level of public debt. The
GBP could remain vulnerable if the UK government refuses to change tack and/ or
pushes back against the release of any independent evaluation of its policy before
it has announced the full range of its supply-side reforms that will accompany its

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