Pound surges higher, UK budget delayed

The pound has extended its gains and has gained 2.3% this week. In the European session, GBP/USD is trading at 1.1581, up 0.75% on the day.

Sunak delays budget

Incoming UK Prime Minister Rashi Sunak faces profound challenges on the economic front. Sunak will be looking to settle things down after a dizzying pace of developments. He is the third prime minister in just two months, after Liz Truss lasted just 44 days in office. Truss' mini-budget, which included sharp tax cuts was savagely criticised and almost triggered a financial crisis. Sunak will undoubtedly be more cautious and has postponed the government's annual budget from October 31^st to November 17th.

The delay gives Chancellor Jeremy Hunt some time to figure out how to address a budget deficit of around 40 billion pounds. Hunt will want to ensure that the budget does not trigger a negative reaction from nervous markets after Truss's ill-fated mini-budget shook the UK's credibility in the financial markets and sent GBP/USD to a record low. The pound wasn't fazed by the budget delay, as investors appear willing to give Sunak a bit of breathing room as he takes over as Prime Minister.

For the BoE, which meets next week, the budget delay complicates matters. The Bank will now have to publish economic forecasts without the benefit of knowing the details of the government's fiscal plan. The delay has raised the likelihood of a full-point hike to 37%, with a 63% likelihood of a 75 bp increase. The BOE remains committed to taming inflation, which has hit 10% in a weak economy that may already have tipped into recession.

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GBP/USD Technical

• GBP/USD is testing resistance at 1.1558. The next resistance line is 1.1644
• There is support at 1.1471 and 1.1328