Kwarteng Out, Hunt In: What Now?

The UK appoints a fourth Chancellor in as many months, and while it helped stabilise the pound, the next question is for how long.
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Coming to the rescue

Two somewhat positive things happened recently for the UK:

a) PM Liz Truss replaced Kwasi Kwarteng with Jeremy Hunt.
b) The BOE's bond-buying scheme concluded.

As a result, the pound reacted positively, with gilts falling in the long end and pension funds no longer at risk. Pension funds that refused to take up the BOE's bond-buying program were vindicated as the measures that were putting them at risk of margin calls were taken off the table by the government.

The new Chancellor was quick to effectively reverse practically all the promised tax cuts, which were what had created panic in the markets. He also pledged to bring out what amounted to a full budget by the end of the month, in conjunction with the OBR and ahead of the next BOE meeting.

Back to square one

When Boris Johnson resigned, the initial evaluation was that fiscal policy would remain the same. Truss winning on a platform of cutting taxes didn't immediately suppose a problem. When the "mini-budget" was presented, offering increased spending and tax cuts but no details on how to finance it, markets worried that a significant change might happen. Hunt's appointment as Chancellor effectively put back the initial assessment that fiscal policy under the new administration would remain largely the same. Jeremy Hunt did support Sunak's bid for the premiership, and his program, as presented so far, broadly represents what was already envisioned by then Chancellor Sunak.

Markets don't like uncertainty, and the continuation of the status quo is likely to remain reassuring. However, the issue now becomes political; Truss; U-turn was in the face of Conservative MPs who chose her over Sunak. Johnson's foibles aside, generalised discontent among the British public was due to the poor economic situation, and the government was expected to keep doing the same things before Johnson was given the sack. How long Hunt is around to reassure the markets likely has more to do with how long Truss can hold on to power in the face of an increasingly popular Labour and increasingly irate Tories.

GBP/JPY breaks away from flag

GBP/JPY broke outside its rising flag pattern recently, defined by the short-term descending channel. The bullish flag pattern often leads to a breakout extension equal to the range of the flag, namely – the measured move. Between 165.70 and 159.70, the projected target price lies at 171.70, a tad above the current ceiling formed at 170.00.

Both lines and the histogram of the MACD indicator show a bearish divergence, offering a potential pullback if not a reversal down once the measures move is reached. 165.70 would turn to support, with the 160.00 round level forming a major floor being the golden pocket of the 148.75-165.70 upward leg and a former swing low. But in case the measured move target at 171.70 breaks, it opens the door to 172.00, which is the 138.2% extension of the said leg.

Key takeaways

UK's new Chancellor announced that a full budget would be released at the end of the month, which caused the pound to react positively. The BOE's bond-buying scheme conclusion also impacted the British currency as it pulled pension funds out of risk. The fiscal policy under Jeremy Hunt broadly supports the program envisioned by former Chancellor Rishi Sunak, bringing it back to its original Johnson assessment.