The Pound Sterling (GBP) is experiencing a decline as the UK government considers avoiding tax hikes in the upcoming budget. This potential move has triggered a downward trend in the currency, impacting its performance against other major currencies like the US Dollar (USD). The Financial Times (FT) reports that Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves might scrap their plans to raise basic and higher tax bands in the Autumn Budget on November 26th. Instead, the government could focus on non-direct revenue sources to cover the £30 billion fiscal gap, according to the FT.
This shift in strategy could have significant implications for the UK's fiscal debt, as the absence of tax hikes might increase interest obligations on government debt. As of the latest reports, 10-year UK gilt yields are trading at 0.8% higher, near 4.40%.
The market's reaction to this news is evident in the Pound Sterling's performance. During the European trading session on Friday, the currency traded 0.4% lower, reaching near 1.3130 against the US Dollar. This decline is attributed to cautious investor sentiment ahead of key US economic data releases, which were halted due to the government shutdown. The US Dollar Index (DXY), tracking the Greenback's value against six major currencies, is also edging lower, approaching a two-week low of 99.00.
The situation is further complicated by the Bank of England's (BoE) potential interest rate cut for the December policy meeting. Weak employment data for the three months ending September and the flash Q3 Gross Domestic Product (GDP) data have accelerated BoE dovish bets. The ILO Unemployment Rate rose to 5%, while the economy expanded by a marginal 0.1%.
Technical analysis reveals that the Pound Sterling is trading below the 200-day Exponential Moving Average (EMA), which is around 1.3276. This bearish trend is supported by a struggling 14-day Relative Strength Index (RSI) that remains below 40.00. Key support and resistance levels are near 1.2700 and 1.3370, respectively.
The economic landscape is also crucial in understanding the Pound Sterling's trajectory. The Gross Domestic Product (GDP) is a critical indicator, released monthly and quarterly, measuring the total value of goods and services produced in the UK. A rise in this indicator is generally bullish for the currency, while a low reading is bearish. The QoQ (Quarter-over-Quarter) reading compares economic activity in the reference quarter to the previous one.
As the market awaits the UK Consumer Price Index (CPI) data for October, investors are closely monitoring these economic indicators to make informed decisions about the currency's future.
