The British Pound could benefit from the new tax cuts and increased spending on benefits by the British government, which contradicts the market's expectations for interest rate cuts by the Bank of England, according to analyses following the latest update of the government's budget. The gains from the upward rebound for the British Pound against the US Dollar (GBP/USD) last week reached the resistance level of 1.2615, the highest for the currency pair in three months, before closing the week stable around 1.2595.
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UK Chancellor Jeremy Hunt announced a mix of increased spending and tax cuts, totaling up to £14.3 billion in the next fiscal year, driven primarily by a 2.0% cut in the National Insurance tax rate. Commenting on this, Chris Turner, head of Forex analysis at ING Bank, says: "We believe the British Pound will welcome some of the more flexible fiscal policies at this stage."
Capital Economics says the smaller fiscal pressure could boost GDP growth in 2024/25 compared to expectations by about 0.2%, which might mean, marginally, that inflation is slightly higher than otherwise. George Vessey, senior Forex analyst at Convera, says: "There's a possibility that the tax cuts could lead to some gains for the British Pound, as this may push some market participants to expect less monetary easing from the Bank of England next year as a result."
For the British Pound, what matters is how these policy changes will support inflation in the coming months, as this will have effects on the future settings of interest rates at the Bank of England. If interest rates remain high for a longer period, the British Pound could be supported. Paul Dales, a British economist at Capital Economics, says: "The smaller fiscal pressure could mean inflation is slightly higher than otherwise, supporting our view that the Bank of England will not cut interest rates until late 2024 instead of mid-2024 as widely expected."
The pound-to-dollar forecast shows that since August, the British Pound has steadily declined against the Euro and other major currencies as markets lowered their expectations for further interest rate hikes by the Bank of England and raised expectations for an interest rate cut in 2024, mainly in response to signs of declining inflation. However, this trend toward lower interest rate expectations may have reached its limit, partly due to expectations that the recently announced Treasury fiscal plans support inflation.
The weakness of the British Pound may be limited from here if interest rate cut bets retreat. Commenting on this, Valentin Marinov, a Forex analyst at Crédit Agricole, says: "The markets can still try to assess the impact of the upcoming tax cuts on the UK economy and whether this may mitigate the Bank of England's expectations of monetary easing next year. The British Pound may welcome any final rebound in interest rates."
According to Forex trading, the British Pound's exchange rate against the Euro did not change significantly on the day of the Autumn Statement, suggesting few surprises. However, the currency pair rose by more than half a percent the previous day, partly thanks to news that the government had accepted a recommendation to increase the minimum wage by 9.8%, outpacing inflation. Another key element in the Autumn Statement was the tax relief granted to companies, allowing them to reduce their taxable profits by deducting the value of investments.
Recently, the UK's Office for National Statistics revised its estimated size of the UK economy upwards, allowing the Office for Budget Responsibility to predict that the British economy will be about 5.5% larger at the end of the forecast period than previously thought. This comes despite the Office for Budget Responsibility revising its forecasts for real GDP growth in 2024 from 1.8% to 0.7%. However, it's important to emphasize that Britain's fiscal policy will continue to face pressures over the coming years, even if less than previously expected. Accordingly, Capital Economics estimates the pressure to be £55.9 billion, or 2.1% of GDP, in 2024/25.
Latest British Pound to US Dollar forecasts:
According to the performance on the daily chart below, the price of the British Pound against the US Dollar GBP/USD is still on its upward trajectory, and breaking the 1.2600 resistance is a crowning of the bulls' control over the trend. At the same time, technical indicators are moving towards levels strongly saturated with buying. The best selling deals are from the resistance levels of 1.2630 and 1.2700 respectively without risk. Considering that American economic data and statements from many officials of the US Central Bank's policy will have a strong and direct impact on the performance of the currency pair, caution is required. Currently, the support at 1.2410 is most important for the bears to start taking control.