- The GBP/USD got off to a strong start this week, but its recovery faltered after former chancellor Rishi Sunak was confirmed as the next prime minister-in-waiting after the Conservative Party leadership election.
- This will have major ramifications for the pound and the UK economy in the coming months.
- The recent rebound gains for the GBP/USD currency pair stopped at the 1.1500 resistance level and settled around the 1.1450 level at the time of writing the analysis, waiting for anything new.
The British Pound rose against most of the major currencies after former Prime Minister Boris Johnson withdrew from the race for the Prime Minister position, leaving former Chancellor Rishi Sunak on his way to the coronation. However, the Pound's early gains quickly faded after newly chosen Prime Minister Rishi Sunak warned of tough times ahead for the economy and tough fiscal decisions in an address to Parliament. This all came on the heels of S&P Global PMI surveys indicating that the UK's manufacturing and services sectors slid deeper into recession in October.
It was only the latest in a growing list of indicators that the economy is slowing faster than expected by the Bank of England and other forecasters for the last quarter. This could signal the beginning of a downturn that recent forecasts from the Bank of England warned could last for up to five quarters.
But any slowdown could worsen in the coming months if the new government headed by Prime Minister Sunak goes ahead with widely expected cuts in public spending as part of upcoming efforts to balance the national books. A more economical approach to national finances has been committed which is one reason why his election will have significant implications for the economic outlook in the coming months and quarters.
"Rishi Sunak will take the keys to 10 Downing Street today. He has spoken of the 'profound' challenges facing the UK economy, following Chancellor Jeremy Hunt's comments that 'impressive' spending decisions must be made Sunak has been voted on a fiscal rectitude card that may be good for gold, but less beneficial for the pound,” said Chris Turner, analyst at ING Group, “Obviously October 31 will be another massive day for UK financial markets as Sunak/Hunt delivers their financial solution. But with dollar support as we do, we suspect GBP/USD needs to trade above 1.15 and hold sub-1.10 targets later in the year EUR/GBP to track the 0.8650-0.8800 range for now,”he added.
On his part Andrew Goodwin, Chief UK Economist at Oxford Economics said the following “We believe Rishi Sunak as Prime Minister offers some upside to the UK's economic outlook. But this both fiscal and monetary policy expected to tighten into a possible recession means that a return to economic orthodoxy carries its own risks.”
GBP/USD Forecast
So far, the GBP/USD is trying to maintain the recent rebound gains, and breaking the general bearish trend needs to test the 1.1550 and 1.1700 resistance levels, respectively. On the other hand, according to the performance on the daily chart, it will be important to break the 1.1290 support level for the bears to dominate again. I still prefer selling sterling dollars from every bullish level.
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