The UK Government U-Turns on Top Tax Rate, GBP/USD Supported
GBP/USD Analysis
Markets reacted negatively to the UK government's Growth Plan [1] that included tax cuts and was not accompanied by an assessment by the Office for Budget Responsibility (OBR), sending the pair to all-time lows last Monday, while UK100 slumped and bond yields surged.
The Bank of England issued a statement, saying 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], before stepping in with temporary long-date bonds purchases to "restore orderly market condition". [3]
These actions helped calm market and the British Pound staged a relief-rally, posting its best week of the year and covering more than half of September's losses. After last week's crazy price action, GBP/USD seems to stabilize at the start of the new one, finding support from the governments U-turn on part of its spending package.
After relevant reports, UK Chancellor of the Exchequer Kwasi Kwarteng, confirmed today ahead of his speech at the Torry Conference later in the day, that he will not go ahead with the abolition of the 45% top income tax rate. [4]
The government's fiscal plan may lead the Bank of England to more aggressive rate hikes, as the UK surprisingly avoided a GDP contraction in Q2, while expectations around the Fed have moderated due to recession fears.
CME's FedWatch Tool still prices in a 75 basis points hike in November and a 50 bps move in December at the time of writing, but with lower 51.2% probabilities for both and the US Dollar has deflated over the last few days. [5]
Given the relief-rally, GBP/USD now has the opportunity to push for the critical 1.1400-20 region, which includes the EMA200 and the 76.4% Fibonacci of the September high/low plunge. Daily closes can put near-term bias on the upside, but we are cautious for now about a broader advance towards and beyond 1.1738.
Despite the rebound, monetary policy differential is unfavorable for the pair and it is hard to see sustained Dollar weakness, as long as the Fed remains committed to its aggressive tightening path. Below the EMA200, GBP/USD is vulnerable to sub-1.1000 moves, although a decline below the ascending trendline form the record lows may require fresh impetus.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. With extensive experience in market analysis and a strong foundation in international relations, he brings a unique perspective to financial markets. Nikos emphasizes not only technical analysis but also on fundamentals and the growing influence of geopolitics on financial trends.
As a Senior Financial Editorial Writer, he delivers comprehensive and forward-looking insights across a wide range of asset classes, including equities, commodities, and currencies. His work explores how macroeconomic events, political developments, and global policies impact market dynamics, providing readers with a deeper understanding of both short-term movements and long-term trends.
References
| Retrieved 03 Oct 2022 https://www.gov.uk/government/news/chancellor-announces-new-growth-plan-with-biggest-package-of-tax-cuts-in-generations | |
| Retrieved 03 Oct 2022 https://www.bankofengland.co.uk/news/2022/september/statement-from-the-governor-of-the-boe | |
| Retrieved 03 Oct 2022 https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation | |
| Retrieved 03 Oct 2022 https://twitter.com/KwasiKwarteng/status/1576820620293468160/photo/1 | |
| Retrieved 12 Apr 2026 https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html# |
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