The Bank of England is pondering its response to what has happened with the assets of the United Kingdom. A rough relationship between the Truss government and the capital market eventually led to where the markets are right now.
GBPUSD carries volatility that makes it rather difficult for FX traders to judge its inclusion in the portfolio. The implied volatility has been at its highest since March 2020, with 29.4% on its charts. The high-low range also touched the highest since March 27, 2020, with a 900 pip high-low range.
Volatility is currently under control, and the Bank of England would want some credit for it. The financial institution decided to continue its long-term bond purchase program. This move came with the support from the Truss government, which displayed a (notorious) U-turn on its decision regarding scrapping the 45% tax rate.
Call it internal pressure, but the move is indeed a u-turn. The market understands that it was an attempt to save the government from getting imploded and to take some pressure off.
Meanwhile, there is a chance of witnessing a hike of 30bp and bringing the rate up to 5.59% for the meeting of May 2023. This could be the highest pricing of the bank rate in the future. With a u-turn on the tax cut move, there is a question if every other policy will have the same fate or something on a similar line achieved on compromise.
The U-turn on the tax cut happens to a small portion of what the government would need to reach out to the capital market to borrow. A representation of 4.5% has a minor impact, and the expected cost stands at 45 billion pounds.
The idea that the u-turn is a forerunner to a total unwind of the fiscal stimulus is another circumstance in which the u-turn works effectively. The result could bring a reduction in the requirement of funding by the government. The estimates stand right for the next two years, provided the Truss government continues to receive the support of its cabinet ministers.
A couple of them called the project over after she missed her chance to bring most of the ministers on the same page where the objectives lay.
The trading pair has, for now, reclaimed 1.1274. Many believe a further squeeze to 1.1400 could have happened, provided the entire policy was reversed. As stated in the Pepperstone review, there could be a need for the renewed selling of UK bonds to pressure the Truss government to adopt better measures.
If that does not work, a further downfall in the GBP will push her government to take fairly radical action. The pricing risk of GBP continues amid uncertain circumstances, pinching volatility to the extent that it could hurt at a macro level.