The beleaguered pound just got a much-needed boost, but the jury’s out on how long it’ll last.
(Bloomberg) — The beleaguered pound just got a much-needed boost, but the jury’s out on how long it’ll last.
Sterling climbed as much as 0.7% to $1.16 on Tuesday after sliding to the lowest since March 2020 overnight. The rebound was fueled by a report that incoming Prime Minister Liz Truss had drafted plans to avert an energy crisis which risked worsening the UK’s longest economic slump since the financial crisis.
The blueprint represents a rare bit of good news for cable which has been caught in a downdraft as soaring inflation and fears of a recession cloud the UK economic outlook. The currency has fallen for three straight months but analysts surveyed by Bloomberg expect it to climb to $1.19 by March 2023.
“Sterling is rising on the argument that the UK economy might not now take such a big hit from energy prices,” said Ray Attrill, head of FX strategy at National Australia Bank Ltd. in Sydney. “The size of potential fiscal support might mean the Bank of England will be emboldened to go even harder to restrain demand to quell underlying inflation pressure.”
However, a technical indicator suggests the pound’s gains may be fleeting. Despite the advance on Tuesday, the currency remains in a bear trend channel versus the dollar with additional trendline resistance emerging around $1.20.
“The key to whether or not the bounce can be sustained is the government’s credibility in costing the plan and avoiding a further larger blowout in the fiscal deficit,” said David Forrester, senior FX strategist at Credit Agricole CIB’s Hong Kong branch.
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