The pound sterling was observed circulating with a narrow range of movement and minimal volatility in trading early in the European session on Friday (18/November).
The GBP/USD consolidated in a range of multi-month highs in the 1.1900s. This pair was following the announcement of a new fiscal budget plan from the UK Finance Minister yesterday.
UK Finance Secretary, Jeremy Hunt, yesterday announced a new set of fiscal policy plans. It is especially the one that include tax hikes as well as budget savings of up to GBP55 billion (about 2% of UK GDP).
The plan is primarily aimed at restoring the financial credibility of the British government, which had been stalled during PM Liz Truss' brief reign. Market participants warmly welcomed this new fiscal policy package.
UK recession Threat is Still There
It was as evidenced by the relatively stable situation of the UK financial market. The policy package is unlikely to be able to stop the current threat of a United Kingdom recession.
Meanwhile, the details are already satisfactory enough for market participants. A mild financial market reaction to the Autumn Report will be exactly what HM Treasury wants.
It means that the Hunts task is complete. That was said by Simon Grench, economist at Panmure Gordon. "The flat FTSE, as well as the GBP exchange rate against EUR and USD, represents the implied approval of financial markets.
This aspect was an important one after the previous Finance Minister's mini-budget disaster two months ago. That was stated by Michael Field, a European Equity Strategist at Morningstar
Poundsterling Can be Underpressured Longer
Beyond the current market reaction, analysts think this austerity-focused fiscal policy in the era of PM Rishi Sunak could put pressure on the pound sterling rate over a longer period of time.
Savings in state spending will further weaken domestic economic activity in times of recession. Such savings can also help dampen inflation, so that the British central bank (BoE) does not have to raise interest rates too high.
That is in order to achieve its desired inflation target. The analysts continue to expect the GBP to underperform against most G10 currencies other than the USD.
This possibility was said by MUFG's Derek Halpenny. The tightening fiscal policy ahead of the recession will weigh on GBP in the market.
The Index of USD was Slumped Before
The US dollar index yesterday (15/November) had slumped due to the improvement in global market sentiment. That was as well as the producer price index (PPI) data report that missed expectations.
PPI was recorded to grow only 8.0 percent For year on year period in October 2022. It means that these numbers are lower than the consensus estimate of 8.3% and the September achievement of 8.4%.
In line with previous America's consumer inflation data, the PPI further emphasized the possibility that the Federal Reserve will slow the pace of interest rate hikes going forward.
Although a Fed official affirmed their commitment to fight inflation aggressively, the market still sees it as a negative signal for the United States dollar so far. It made this currency slumped.
Explosion in Poland Shook the Global Market Sentiment
Unfortunately, an explosion in Poland later shook global market sentiment and triggered upheaval on several major currencies. The US dollar rate immediately strengthened again.
Meanwhile the euro slammed below the 1.040s threshold. When the news was written in the Asian session on Wednesday (16/November), the USD index was still circulating in the 106.60s.
Elsewhere, the EUR/USD was in the 1.0357s. Firefighters said two people were killed in an explosion in Przewodow, a village in eastern Poland located near the border with Ukraine.
A NATO official said it was investigating allegations that the blast originated from a Russian missile attack. These news make the financial market is shaking again.
