GBP/USD to avoid a new low on UK fiscal rethink, but a lasting race higher is unlikely – SocGen

Talk of a fiscal policy u-turn in the United Kingdom has helped the mood. However, the GBP/USD pair is unlikely to stage a sustained rally for the time being, economists at Société Générale report.

Long gilts to benefit on a rethink on fiscal policy

“A rethink on fiscal policy would be embarrassing to the new Government, but long gilts and sterling ought to benefit.”

“Talk of a break of GBP/USD parity should fade away, particularly if the MPC matches the Fed’s rate move in early November (we expect 75 bps from each of them and wouldn’t be surprised if the UK MPC were to deliver 1%). However, this week’s UK output data suggest the economy may have slipped into recession in Q3, and the possibility of escalation in the war in Ukraine, or of a cold winter triggering power cuts, will continue to hang over sterling.”

“While a fiscal rethink should be enough to ensure that we have seen the low for GBP/USD in this cycle, it wouldn’t be a signal for a lasting move higher, just yet.”