GBP/USD falls as UK political chaos continues & retail sales fall – Daily Market Brief, October 21, 2022

After a brief spike higher after PM Truss resigned, GBP/USD resumed its fall to a weekly low. All eyes will be on who wins the leadership contest, with ex-PM Boris Johnson in the lead.

·         GBP/USD has fallen 17% so far this year and could continue falling

·         UK retail sales slumped by more than expected in September

·         EUR/USD falls ahead of Eurozone consumer confidence, which is set to fall to a new record low

Both the FTSE and the pound booked mild gains yesterday after Prime Minister Liz Truss resigned. Her resignation came after 44 chaotic days in power. After Truss failed to command support for her badly named mini-budget, and Chancellor Hunt rolled back most of the measures, the PM had little credibility left. The FTSE index dropped 5% across the six weeks that she ruled, and the pound fell 2.5% across the same period. While the pound saw a small relief rally following Truss’ announcement, the gains were short-lived. GBP/USD has resumed its downtrend today, falling below 1.12 as it once again looks vulnerable at a weekly low.

Attention is turning to who might come to power next. Ex-Prime Minister Boris Johnson has thrown his hat into the ring and is leading the polls against former Chancellor Rishi Sunak, among others.

Whoever takes over at the helm will inherit a bleak UK economic outlook. The pound is also likely to keep falling as a reflection of the deteriorating outlook as the economy faces rising borrowing costs, crippling energy bills, and higher taxes. Consumer morale has also fallen toward historic lows in October. GBP/USD, which has fallen 17% so far this year, could well extend those declines.

Wall Street falls

US stocks ended lower as investors digested broadly encouraging corporate earnings against concerns of a hawkish Federal Reserve and slowing growth. So far, banks, airlines, and some tech firms have reported a solid performance with constructive forward guidance. Meanwhile, treasury yields have continued pacing higher after hawkish Fed chatter. The 10-year treasury yields rose to 4.23% yesterday, a level last seen in 2008.

The lower close on Wall Street is translating to a weaker start in Europe. The DAX is set to open 1% lower, and the FTSE points to 0.5% losses on the open. US futures are also in the red.

UK retail sales

Slumping UK retail sales are adding to the depressed market mood. Sales tumbled 1.4% MoM in September after falling -1.7% in August. This was a more significant drop than the 0.5% fall which was forecast. The data highlights the pressure that household incomes are under as prices keep rising. September’s data was also affected by the public holiday to mark the Queen’s funeral.

Eurozone consumer confidence

Eurozone consumer confidence is due later in the session and is expected to fall to -30 in October from -28.8, a new record low. The drop in confidence is expected as households brace for a winter energy crunch and as inflation sits at a record high.

EUR/USD has failed to hold above 0.98 and trades at 0.9770 at the time of writing. Weak consumer sentiment could see the pair fall further.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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