GBP/USD trips down below 1.1100 on sour sentiment, strong US dollar

• GBP/USD dropped to the 1.1000 area on broad US dollar strength.
• Investors’ mood deteriorated on expectations of weaker US Q3 earnings, on fears of the Fed’s triggering a recession.
• Fed officials expect rates to be above 4% in 2023, disregarding rate cuts throughout the year.
• UK’s Finance Minister, Kwasi Kwarteng, moved forward the presentation of his fiscal plan, to October 31, before BoE’s November meeting.

The GBP/USD extended its losses to four straight days after reaching an October high of 1.1495 after UK’s Prime Minister Liz Truss made a U-turn in the 45% tax cut budget. However, the damage was done, as the Bank of England (BoE) had to step in to calm the turmoil in the bond market. Nevertheless, recent US dollar strength, alongside weak fundamentals in the UK, is a headwind for the GBP/USD.

At the time of writing, the GBP/USD is trading at 1.1025 after hitting a daily high of 1.1110, though it is below its opening price by 0.58%.

Sentiment remains sour, as reflected by US equity markets. Fears that US companies will miss Q3 earnings expectations keep investors on their toes. That, alongside worries that the US Federal Reserve would continue to tighten monetary policy but would not be able to achieve a “soft landing,” added a pinch of salt to the already deteriorated mood.

Last  Friday’s US Nonfarm Payrolls report was better than expected, which opened the door for further Fed tightening. Also, the Unemployment Rate ticked lower, from 3.7% estimated to 3.5%, revealing that the Fed needs to do more.

Fed officials during the last week expressed that they’re resilient to tackle inflation, despite acknowledging that the economy is slowing down and that it could trigger a recession. However, Fed policymakers said that rates must be higher in restrictive mode, above the 4% threshold.

During the day, the Chicago Fed President Charles Evans said that the US central bank could be able to slow down inflation “while also avoiding a recession.” Evans added that he stills sees the Federal funds rate (FFR) above the 4.5% early in 2023 “and then remaining at this level for some time.”

The US Dollar Index, a gauge of the greenback’s value, is advancing 0.45%, at 113.245, bolstered by investors seeking safety.

On the UK’s side, the Bank of England intervened in the UK’s bond market on Monday. Even though the BoE was expected to buy double September’s 28 GBP 5 billion, they only bought GBP 853 million. Of note is that the Chancellor of the Exchequer, Kwasi Kwarteng, said he would bring forwards his medium-term fiscal plan, including how the tax cuts will be paid for, on October 31, according to Reuters.

The change in the date, from November 23 to October 31, would give some time to the BoE to assess the government’s budget before it announces its monetary policy on November 3.

All that said, the GBP/USD reacted downwards, despite increasing bets that the Bank of England would hike rates aggressively. Nevertheless, UK’s gloomy economic outlook, and Brexit jitters, would likely keep the British pound pressured, opening the door for a re-test of the GBP/USD YTD lows around 1.0350s.

GBP/USD Key Technical Levels