FX.co ★ GBP/USD. Are clouds gathering over Liz Truss?

GBP/USD. Are clouds gathering over Liz Truss?

The pound, paired with the dollar today, is trying to develop a correction, winning back some of the lost positions. The GBP/USD pair has lost more than a thousand points in a few trading days. If the price fluctuated around 13-14 figures last week, then yesterday, the pair updated a new historic low, dropping to the level of 1.0345. However, the price did not stay here for long – traders did not dare to keep sales at such extreme levels. Buyers who pulled the pair into the area of the 6th figure entered the game. Today, traders are trying to build on success. When writing these lines, the GBP/USD pair had already crossed the 1.0800 mark, indicating the strength of the northern pullback. And yet, in my opinion, the British currency is still vulnerable, especially when paired with the dollar, which has recently been in high demand throughout the market.

First of all, it should be recalled that the collapse of the British currency began not yesterday but on Friday. It was after the British Finance Minister presented a government plan that provided for large-scale tax cuts for individuals and legal entities and other tax breaks "to support the country's economy." At the same time, the Finance Minister clarified that the government plans to reduce taxes in addition to huge energy subsidies.

GBP/USD. Are clouds gathering over Liz Truss?

On the one hand, the tax reduction plan aims to stimulate economic growth and reduce household burden. But market participants (as well as many British politicians) were concerned about the possible consequences of this tax reform. Traders have concluded that this is when the road to hell is paved with good intentions. Actually, for this reason, the pound paired with the dollar could not hold even in the area of the 10th figure, rolling down to the level of 1.0345.

It is noteworthy that today's correction in GBP/USD is also due to news from the UK. However, this time the information background has a radically different color. So, according to the British edition of Sky News, the British Prime Minister may be declared a vote of no confidence because of the economic policy of her government. Moreover, the initiators of this process will not be Labour (who initially criticized the policy of the Trails) but the Conservatives. According to journalists, members of the Conservative Party have already begun collecting signatures to declare their no confidence in Liz Truss. It is known that some party members of the new prime minister are dissatisfied with her first steps in the office. First, they criticize the measures announced on Friday to overcome the economic crisis.

According to the established procedure, a special committee in the British Parliament (the so-called "1922 Committee") must first receive a certain number of letters from conservatives of no confidence in the prime minister. About 15% of Tory MPs should vote to initiate a vote (approximately 55 parliamentarians). Then a secret ballot of all Conservative members of Parliament is held, during which the Tories decide whether to express confidence in their leader. And here, there are two options for developing further events: either a vote of no confidence in the prime minister and subsequent resignation; or a vote of confidence and annual immunity from such processes.

Judging by the information from the British media, today we can talk about the implementation (or rather, attempts to implement) the first stage of this procedure: the opposition wing of the Conservatives in the British Parliament collects signatures to initiate the relevant vote.

At the moment, it is difficult to say about the prospects of an "internal revolt" among conservatives – even British observers are lost in riddles. Nevertheless, the information hype around this process has already allowed GBP/USD buyers to win back some of the lost positions.

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GBP/USD. Are clouds gathering over Liz Truss?

But here, it should be remembered that such information bubbles (after all, there are no official messages about collecting signatures) have a habit of bursting. And suppose it soon becomes known that representatives of the opposition wing of the Conservatives could not gather enough votes in favor of holding a vote of no confidence in the prime minister. In that case, the pound may again test historical price lows. After all, in this case, it will become obvious that the anti-crisis plan announced by the Ministry of Finance will most likely be implemented. At the same time, it is worth emphasizing that the opponents of tax reform have hope only for the opposition conservatives since the Labor party does not have a majority in Parliament.

In my opinion, the situation remains too precarious for the British currency. The correction of GBP/USD is caused by information noise and of rather dubious quality. Yes, on the one hand, there is no doubt that a certain number of Conservative MPs will be in opposition to the current Prime Minister, Liz Truss. A similar situation was observed during the premiership of Boris Johnson (as well as Theresa May, David Cameron, etc.). But here, the key question is different: will the opposition wing of the Tories be able to unite around a sufficient number of like-minded people? To date, this question has not been answered. Moreover, the process of initiating a vote of no confidence in the prime minister is in its infancy, at the level of newspaper rumors.

Therefore, the current northern pullback of GBP/USD should be treated with great caution. I think it is advisable to take a wait-and-see attitude for the pair, until the situation stabilizes.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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