GBP/USD Pressured After the IMF Criticized UK’s Fiscal Package
UK Growth Plan Fallout
The UK government unveiled last Friday its Growth Plan, which includes massive tax cuts and reductions in the Stamp Duty, in an effort to revitalize the economy [1]. However, the fiscal package has received criticism and there are concerns over its impact on UK debt.
It is worth noting that, contrary to common practice, the plan was not accompanied by an assessment from the Independent Office for Budget Responsibility (OBR) for its impact on the economy.
GBP/USD was already in the doldrums following the Fed's new outsized rate hike and hawkish commentary, but crumbled to all-time lows this Monday, as markets reacted negatively to UK planned tax cuts.
The Bank of England responded to the Pound's collapse with a statement that it "is monitoring developments in financial markets very closely" and that it "will not hesitate to change interest rates by as much as needed". [2]
However, I found the intervention rather weak and vague, while the bank essentially endorsed the government's fiscal plans, reserving any assessment for its next meeting, which is more than a month away.
Yesterday, the International Monetary Fund weighed on the issue, with bolder commentary. According to the BBC, the IMF stated that it does not recommend "large and untargeted fiscal packages", adding that they must not work against monetary policy. It also called the UK government to reevaluate those measures. [3]
GBP/USD managed to cover much of Monday's losses, but rejected the 38.2% Fibonacci of September's drop and faces renewed pressure today, in the aftermath of the IMF's statement. This keeps the door open for new record lows (1.0356) although it is not easy to approach the pair technically, given the outsized move that has led to uncharted territory. In any case, as long as the Fed maintains its super hawkish stance, it is hard to see any sustained reaction.
On the other hand, another pushback by the British Pound towards 1.0884-1.0932 would not be surprising, but a strong catalyst will be required for further recover.
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
| Retrieved 28 Sep 2022 https://www.gov.uk/government/news/chancellor-announces-new-growth-plan-with-biggest-package-of-tax-cuts-in-generations | |
| Retrieved 28 Sep 2022 https://www.bankofengland.co.uk/news/2022/september/statement-from-the-governor-of-the-boe | |
| Retrieved 20 May 2023 https://www.bbc.co.uk/news/business-63051702 |
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