September 2022: The pound plunge that made history
The aforementioned interest rate adjustments and the USD's reputation as a safe haven probably would not have been enough on their own to produce the historic GBP/USD plunge we have witnessed. The currency pair has been on a downward trend since the beginning of the year and reached an extreme towards the end of September. The GBP/USD pair fell to an all-time low when its exchange rate dropped below the 1.04 level and the market had already started to look impatiently for the parity line.
But what caused such chaos in the UK? This question is an easy one to tackle - it was political instability. Specifically the state of affairs that the then-new Prime Minister Liz Truss and Chancellor of the Exchequer Kwarteng sent Britain into. The Prime Minister first promised to cap energy prices for the average British household at £2,500 a year, which was to cost the Treasury between £70 billion and £140 billion.
However, the Chancellor's package of measures to cut the tax rate for corporations and the very wealthiest citizens, and several other measures to give relief to the British people, literally came as a shock. However, these measures had a large inflationary effect and undermined the central bank's efforts to fight inflation. The package was thus met with huge criticism from the opposition (understandably) but also from the IMF and the US President. The pound, which has fallen to almost an all-time low, and government bonds, whose yields have risen significantly, have all paid the price. So Minister Kwarteng was dismissed and replaced by Jeremy Hunt. However, the Prime Minister did not stop the situation and had to resign for a record 45 days. Thus, Britain practically went through an economic collapse and the central bank had to step in again to save the day by buying government bonds.
Expected decline of the GBP/USD pair. Source: cTrader
We were expecting a slight correction and then a return to the downtrend. We identified the 1.07 level as the expected level of strong support. However, even we had no idea how huge the fall in GBP/USD would be at the end of September.