GBP/USD Hits Record Lows in the Aftermath of the Fed’s Recent Hike & UK’s Tax Cuts Plan

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UK Tax Cuts

The new UK government unveiled on Friday its Growth Plan, with a series of measures to stimulate the economy - including massive tax cuts - shortly after the energy bills support scheme for households and businesses.

The new plan cancels the scheduled increase in corporates taxes, keeping it at 19%, brings forward the cut to 19% on the basic income tax and reduces the Stamp Duty in order to boost the property market. [1]

The plan has drawn criticism as tax cuts for the rich and trickle down economics, as well as for its impact on UK debt. Mr Paul Johnson who is the Director of Institute for Fiscal Studies for example, remarked that the package puts government debt on "an unsustainable rising path". [2]

Despite the criticism, the newly appointed Chancellor of the Exchequer defended the measures on BBC on Sunday, saying that "there's more to come". [3]

Fed vs BoE

The Us Federal Reserve carried on with its monetary tightening and another 75 basis points increase last Wednesday, marking its most aggressive hike cycle since at least the mid-1990s. Rates now stand at 3.00-3.25% and the highest level in fourteen years.

Officials expect more moves ahead, since the updated staff economic projections, pin median rate at 4.4% by the end of the year, which implies around 100-125 basis points worth of rate hikes.

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Furthermore, the central bank seems to have given up on the idea of a soft landing, as Chair Powell said that no one known if the process of restoring price stability will "lead to a recession or if so how significant that recession would be", adding that "we have got to get inflation behind as. I wish there was a painless way to do it. There isn't". [4]

A day later, the Bank of England also took bold action, by delivering a back-to-back 50 basis rate increase, for a bank that traditionally adjust them in smaller increments. Rates are now to 2.75% and the highest point since November 2008. [5]

The cost of living is very high in the UK, but policy makers now see inflation peaking at 11% in October, lower form their 13%+ projection, helped by the government's Energy Price Guarantee. Last month the BoE had released very gloomy forecasts, expecting economic contraction for multiple quarters. [6]

GBP/USD Impact

The Bank of England may have taken aggressive action on rates in the last two meeting, as its previously conservative moves failed to contain inflation, but the US Federal Reserve is far more hawkish. This policy differential has benefited the greenback and will likely remain supportive.

Meanwhile the British Pound and the stock market, reacted negatively to Friday's Growth Plan announcement. The UK government tries to heat up the economy, as the BoE tries to contain inflation, while providing tax cuts and adding debt.

As such, GBP/USD posted its worst week and worst day of the year on Friday and today it extended losses to all-time lows, going as far as 1.0356 overnight. The previous record low was generally viewed in the 1.0520 region from 1985.

GBP/USD has shed around 20% year-to-date and It remain to be seen if today's record lows will force the central bank to verbal intervention or any other action, such as an emergency rate hike. During the European hours, the pair reacts higher, but remains firmly in negative territory at the time of writing.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 26 Sep 2022 https://www.gov.uk/government/news/chancellor-announces-new-growth-plan-with-biggest-package-of-tax-cuts-in-generations

2

Retrieved 26 Sep 2022 https://ifs.org.uk/articles/mini-budget-response

3

Retrieved 26 Sep 2022 https://www.bbc.co.uk/news/business-62966306

4

Retrieved 26 Sep 2022 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20220921.htm

5

Retrieved 26 Sep 2022 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/september-2022

6

Retrieved 25 Nov 2022 https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022

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