Intense market volatility in Britain has escalated recession risks and global contagion fears. The gold market has been observing the developments cautiously as prices rise from 2.5-year lows.
The move aimed to calm markets after the new Prime Minister Liz Truss's tax-cutting plans triggered massive chaos. With just over three weeks in office, Truss is facing a collapse in the pound, a massive market selloff, a surge in borrowing costs, deep recession risks, and a housing market crash. This week, sterling plunged to record lows against the U.S. dollar.
"Reports suggest that the Biden administration is concerned about the market spillovers stemming from the UK tax plan," said BBH Global Currency Strategy’s head Win Thin."Markets have calmed somewhat after the Bank of England's emergency bond-buying plan was announced. This is similar in spirit to what the Fed did in summer 2019 … The Fed took pains to say it wasn't QE, but its balance sheet grew anyway.
As a result of the situation in the UK, the Bank of England's tightening expectations had elevated. There are now expectations that the BOE could hike by 155 basis points at its November meeting. However, BOE's decision does reinforce a mixed"push/pull" environment for gold, with the winning strategy likely trading gold in pounds, according to MKS PAMP head of metals strategy Nicky Shiels.