Monthly Wrap: GBP – Pound rocked by BoE recession warnings

Key takeaways:

• Pound tumbles as BoE warns of prolonged recession
• Slowdown concerns reverse Sunak relief rally
• GBP Monthly lows: €1.13, $1.11, AU$1.74, NZ$1.91, CA$1.52
• GBP Monthly highs: €1.16, $1.19, AU$1.81, NZ$1.99, CA$1.59

Rishi Sunak’s crowning as the UK’s next Prime Minister allowed the pound to close October on a high. GBP investors were optimistic over Sunak’s appointment amid hopes he would help to restore credibility to the UK, following Liz Truss’s turbulent tenure as PM.

However, this uptick in Sterling was almost immediately reversed following the Bank of England’s (BoE) latest interest rate decision.

While the BoE raised interest rates at its fastest pace in 33 years, this was overshadowed by the bank’s incredibly bleak outlook for the UK economy.

The BoE warned that the UK is likely facing a two-year long recession. Alongside BoE Governor Andrew Bailey’s claim that interest rates aren’t likely to rise as sharply as markets have priced in, this sent the pound sharply lower.

While the pound managed to claw back these losses as November went on, it’s been a rocky ascent for the currency.

Infusing volatility into GBP exchange rates were several mixed UK data releases as well as the publication of the UK government’s long-awaited Autumn Statement.

While bond markets gave their tacit approval to Chancellor Jeremy Hunt’s tax and spending plans, GBP Investors were rattled as he confirmed the UK is in a recession.

Looking ahead, we may see concerns over the UK’s slowdown act as the primary catalyst of movement for the pound as we hurtle toward the end of 2023.

GBP Investors will be keeping an eye out for any data which may shed more light on the depths of the recession facing the UK. If the bulk of these releases point to a sizable slowdown in the fourth quarter then the pound could plunge.

Also influencing the pound will be the BoE’s final interest rate decision of the year. Sterling could find support if markets believe the bank will deliver another 75bps rate hike in December.