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.
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. - ING FX Strategy
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