Monthly Review: GBP Suffers with Parliament in Turmoil. What’s Next? EM Debt, That’s What!

Monthly Review: September 2022

GBP Suffers with Parliament in Turmoil. What’s Next? EM Debt, That’s What!

Overview

Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout October and beyond.

This last month proved to be a roller-coaster for many assets and investors alike, especially in the UK.  Let’s take a look at the Pound in more detail below.

Global stock indices continue to be one-way markets…down.  Will investors show the resilience that we have seen during the last few years and “Buy the Dip”?

The strong USD continues to be an issue.  It may become an even bigger issue so, read on to find out why!

GBP

Liz Truss took over as Prime Minister in September and immediately set about to kick-start the economy.  She announced tax cuts to get the British consumer spending again and to aid those suffering from extremely high energy bills.  Tax cuts always affect a currency negatively and this was the case with GBP.

Unfortunately, over the last weekend of the month, Kwasi Kwarteng, the new chancellor of the exchequer mentioned that further tax cuts would be coming and this sent GBP plummeting to multi-decade lows against many currencies.

Even the dramatic rise in Interest Rates by Andrew Bailey and the Bank of England could not stop the slide.  One of the few saving traces for Pound Sterling is that the UK has very little in the way of Emerging Market debt on its books, contrary to other major currencies.

Having said that, many banks, analysts, and other members of Parliament are less than impressed with the current government plans and, as they do in Britain, are calling for the resignation of the finance minister and/or a new election.  Either of these will be negative for the UK economy.

Again...watch this space! (Just minutes before publishing this blog, they changed their collective minds to avoid a party rebellion, so, no big tax cut apparently.)

Cable (GBPUSD) fell as low as $1.035 but, fortunately, rebounded by the end of the month.

As we can see, the technicals during the last week of the month look bullish on GBPUSD but watch out for the upper trend line which marks out the overall bearish trend on GBP and the strength of USD.  Going into October, we should see the Pound getting stronger but, as we know, anything can happen.

UK Equities

The only real measure we have to evaluate UK Equities is the FTSE (UK100) chart on the Valutrades MT4 platform.

Under normal circumstances, the Index tracks in the opposite direction of GBP but the UK, and the rest of the world for that matter, is not under normal circumstances.  Seeing UK100 falling is not surprising but what is interesting is the level. We see the 6820 area as a key level of support that has held for about a year and a half.

USD 

The USD Index has fallen marginally which is good news for everyone.  Obviously, a strong USD is good for US importers but very bad for US exporters as foreign customers are finding American products to be too expensive.  The continuing issues with inflation, globally, are not helped by a strong currency in the world’s largest economy.

The biggest problem, however, is the potential crisis "bubbling under the surface".  It is a problem that the “man-on-the-street” doesn’t think about but it will soon be the “elephant in the room” among large economies and certainly the IMF.  (I will try to come up with more metaphors in the coming months).

Emerging Market (EM) USD-denominated debt is and will become a huge issue if the USD maintains its strength.  This is a complicated topic and deserves its own blog but suffice it to say that there is no good option to solve this problem if EMs start to default.

From a technical view, we spotted a Rising Wedge on the USD Index which, as we know, is a bearish signal, and we were correct.  Also, on 29 September price action opened with a gap and the gap was quickly filled.  Keep an eye on this index for further trading opportunities like these!

The charts below tell the story of USD majors with price action flying with only 2 exceptions.  GBPUSD has bucked the trend but we are not convinced that the bearish trend will end and it is likely that the downturn will continue once (if) price action reaches the upper trend line.  The recovery of EURUSD is encouraging but the fundamental pressures of an impending energy crisis, inflation, and the state of play in Ukraine are still a huge shadow over the ECB and the Euro.

US Equities 

The markets have shown great resilience during the last few years.  Investors have held their optimism and influencers, like the heads of major equity funds, have kept spirits high.  We have managed to survive Donald Trump; the worst pandemic in 100 years; we are surviving the lunacy of a psychopathic Russian dictator; but all this is taking its toll on investor optimism.

The chart below on the Dow Jones Industrial Average tells the story with price action moving down in a bearish channel and, sadly, breaking support.

Recently, Valutrades offered its clients the opportunity to trade the Russell 2000, which is an index that captures the market capitalization of 2000 small-cap companies in the US.  The good news is that price action has refused to break below support but we will keep an eye on both sides of this bearish trend that has been running since mid-August.

JPY

Despite our optimism regarding the grand reversal of the Japanese Yen, the Bank of Japan continues to let us down in terms of its monetary policy.  A speech by Kuroda on 22 September gave the markets much optimism (marked in yellow below), but for the most part, it wasn't enough to beat down USDJPY with the bond yield and interest rate differentials winning out again.

The counter-trend price action trades on USDJPY and CHFJPY worked out nicely, however.

Crude Oil 

Despite the threat of an energy crisis in Europe, price action on both Brent Crude and WTI continues lower.  Overall, the threat of impending recession and, therefore limited demand, has kept prices from rising and we find WTI trading in the low $80s.

However, keep an eye on the news as OPEC+ will meet in person for the first time since March 2020.  Insiders feel that production cuts will be announced so watch for volatility.  If the markets take the cuts seriously, we could see a rise in price action into October.  If true, keep watching the Market Blast videos twice a week and we will try to help you spot the reversal and, hence, more trading opportunities.

Gold 

In our section on the USD Index, you will note a dramatic fall on 28 September.  The inverse is true of XAUUSD, of course, as we saw price action jumping up to where the price is today in the high $1600s.

You may also remember our Market Blast video where we pointed out the Rising Wedge on Gold just after the beginning of the month.  This proved to be quite prophetic as price action fell dramatically after the breakout.  Today, we see another Rising Wedge forming and we will keep you up to date during upcoming Market Blast videos.

That’s all for now.  Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of October.