GBP/USD plunges more than 100-pips amidst UK political turbulence

• GBP/USD plummets below 1.1200 due to political/economic turmoil in the UK.
• US Consumer Sentiment improved while inflation expectations arose.
• UK’s PM Liz Truss makes a U-turn on corporate tax, increasing it to raise GBP 18 billion.

The British pound extends its loss amidst two weeks of turmoils, courtesy of UK’s PM Liz Truss’s mini-budget, which ended with the Chancellor of Exchequer, Kwasi Kwarten, replaced by James Hunt, as the PM Truss tries to calm the markets. Additionally, the Bank of England finished its emergency bond-buying program as scheduled, buying close to GBP 2 billion on Friday.

At the time of writing, the GBP/USD is trading at 1.1177, below its opening price, after hitting a daily high of 1.1366.

GBP/USD plunges on political turmoil in the UK; mixed US economic data

US equities are tumbling sharply, a U-turn from Thursday’s reaction to US CPI. Fed officials reiterated that inflation is high, the labor market tight and that further rate hikes are coming. San Francisco’s Fed Mary Daly said that the Federal funds rate (FFR) could peak at around 4.5-5.0% as the US central bank does its best to tame inflation.

Therefore, the GBP/USD tumbled as the greenback got bolstered by investors, on ramping expectations for further Fed tightening. Meanwhile, the US Dollar Index advances 0.75%, at 113.303, underpinned by rising US Treasury yields. Worth noting that the US 10-year yield gains five bps, up at 4.0%.

Data-wise, US Retail Sales disappointed investors, while the University of Michigan Consumer Sentiment exceeded August’s figures. However, American inflation expectations rose by 5.1% in the one-year horizon, above last month’s 4.7%.

On the UK’s side, Prime Minister Liz Truss replaced the former Chancellor Kwarteng with James Hunt while increasing the corporate tax from 18% to 25%, which will raise GBP 18 billion a year. At the same time, the Bank of England finished its bond-buying program, aimed to stabilize the markets, though Gilts, namely the 30-year, is up 26 bps, yielding 4.80%,

Given that backdrop, further volatility will hit the GBP/USD next week. Traders should be aware of over-the-weekend developments in the UK, as speculations mount that Liz Truss could step down as Prime Minister, which is perceived as bullish for the pound. Otherwise, hawkish Fed expectations, and political uncertainty in the UK, would favor the greenback.

GBP/USD Key Technical Levels