IFX Market Report: Friday 21st October 2022

After just 45 days as prime minister, Liz Truss has resigned this Thursday 20th October 2022. She is the shortest-serving prime minister in the United Kingdom’s history. Her “mini-budget” unveiled £45bn worth of tax cuts while increasing spending to support businesses and households for two years during this energy crisis with a plan that would cost £60bn just for the first six months. The plan led government spending to increase but along with it, the cost of borrowing soared with the 30-year yields reaching 5.05% on the 12th October, the highest in the G7 and with the sharpest increase of the G7, even ahead of Italy. The British pound also reached its lowest level ever against the dollar on the 26th September as it plummeted to just $1.0384 as a result of the bond market falling apart. This led the Bank of England to intervene by launching a massive bond-buying scheme to avoid a crash of the gilts markets and pension funds.

Liz Truss eventually U-turned on her mini-budget, dismissing chancellor Kwasi Kwarteng and appointing Jeremy Hunt in hope of salvaging her position, however many Tory MPs started openly criticising her and requesting her resignation via letters of no-confidence. She is due to be replaced by next Friday after an internal vote next week and among top candidates we can find former prime minister Boris Johnson, and the 2nd and 3rd of the last Tory leadership race: Rishi Sunak and Penny Mordaunt.

Inflation reached 10.1% in the United Kingdom in September while retail sales have fallen more rapidly than anticipated at -1.4% for the month, and by -6.9% over the year, much quicker than the -5.0% forecasted.

Japan’s consumer inflation is also reaching an 8-year high, with core inflation rising by 3.0% in September, exceeding the 2% target from the Bank of Japan for the 6th straight month. The situation is delicate for the BoJ as it tries to maintain ultra-low interest rates in an economy barely recovering from the pandemic and widely affected by China’s ongoing lockdowns, which have seen the yen weaken against the US dollar, driving import prices up as oil prices rise as well. USDJPY rose above 150 yesterday, the yen’s weakest point since August 1990, prompting the BoJ to launch a ¥200bn ($1.3bn) bond-buying scheme to support its currency.

Cable proved volatile yesterday, reaching a high of 1.1336 after opening at 1.1208, but eventually closed at 1.1222.

EURUSD remained stable as it opened at 0.9767 and closed at 0.9779.

GBPEUR followed a similar trend, opening at 1.1475 and closing at 1.1476.

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