GBP/USD faces barricades around 1.1250 as Fed hawkish bets soar

By on October 17, 2022 0
  • GBP/USD felt selling pressure as it attempted to clear the immediate 1.1250 hurdle.
  • Soaring bets for a 75 basis point rate hike by the Fed reduced risk appetite.
  • Investors are waiting for more clarity on the UK’s political drama to make informed decisions.

The GBP/USD pair firmly selected offers in the Tokyo session as the risk mood began to fade. Kicking off the quarterly earnings season in the US saw the S&P500 rebound on Monday after a bearish Friday, but has now dampened some gains.

The US Dollar Index (DXY) attempted a rebound after falling below critical support at 113.00. While 10-year US Treasury yields show a lackluster performance. Strong bets for a 75 basis point (bp) interest rate hike by the Federal Reserve (Fed) have so far defended the downside bias for yields. According to the CME tool FedWatch, the odds of a 75 basis point rate hike have climbed to 99.4%.

Meanwhile, the political drama of British Prime Minister Liz Truss sacked Chancellor Kwasi Kwarteng last week has sparked political instability in the pound region. The planning to reverse the proposed rise in corporation tax to 25% from 2023 appears responsible for the removal of UK Finance Minister Kwarteng from her post.

Previously, the decision to freeze corporation tax at 19% led to a sell-off in the UK bond market. UK stock markets picked strong bids and government bond yields soared. This forced the Bank of England (BOE) to step in and announce a bond buying program to support gilt-exposed pension funds.

Pound bulls could face volatility as Goldman Sachs expects a bleak economic outlook for the UK. The bank said that “Due to weaker growth momentum, significantly tighter financial conditions and higher corporate tax from next April, we are revising our growth outlook downwards in UK and we now expect a deeper recession.” UK gross domestic product (GDP) for 2023 by 1%, below previous forecast of a contraction of 0.4%.