British Pound Gains as Govt. Abandons Top Tax Rate Cut
The Great Britain Pounds –the sterling- edged higher to approach $1.12 on the first trading day of the fourth quarter, back to levels not seen in almost two weeks, after the finance minister Kwasi Kwarteng reversed and said he will not cut the top 45% rate of income tax for biggest earners.
The pound sank 8.2% last quarter as the new government announced on September 23rd a mini-budget worth £45 billion by 2026-27 that included several tax cuts, triggering turmoil and mistrust among investors amid concerns over a spike in the UK’s debt levels as no details on the plan or new economic forecasts were provided.
Still, the pound is set to remain under heavy pressure through the last quarter, as the British economy is expected to fall into recession while the Fed is set to continue to raise rates sharply, sending the dollar up.
Britain’s finance minister Kwarteng on Monday downplayed the prospect of new austerity measures to cut public spending, after reversing his plan to abolish the top rate of income tax.
Asked about the possibility of further austerity measures, Kwarteng said: “I don’t think so at all…I think what we’re trying to focus on is growing the pie, growing the economy,” he told LBC radio.
The euro was marginally lower at $0.97965, with expectations for another jumbo European Central Bank (ECB) rate hike this month, following a red-hot inflation read-out, heightening worries that the economy would be tipped into a recession. showed that eurozone inflation zoomed past forecasts to a record high of 10.0% in September, beating expectations of 9.7%.
“The ECB is still going to have to go hard … for me, with Europe and the UK, it’s less about relative interest rate dynamics, and more about growth dynamics,” said Weston. READ: British Pound Faces ‘Perfect Storm’ Despite UK Johnson’s Narrow Win
“I think what we’re starting to try and do now is look at markets where we can price inflation or start feeling a bit more confident about the trajectory around inflation. I think the U.S. falls into that category.”
U.S. non-farm payrolls are due at the end of the week, while a flood of manufacturing PMI data out later on Monday will also give insight into the outlook for the global economy.
Britain’s opposition Labour Party said on Monday the government had destroyed its economic credibility and damaged trust in the British economy, after a U-turn on plans to abolish the highest rate of income tax.
“This is not over – it’s not just some distraction,” Labour’s finance spokesperson Rachel Reeves said in a statement. “They need to reverse their whole economic, discredited trickle-down strategy.”
“Clearly sterling has performed better on the news, but there are still a lot of questions, ultimately the 45 pence tax rate was only a small part of the unfunded tax cuts announced.
“The question remains is this enough? The answer will be clear in a few weeks’ time when the Bank of England measures end.
“UK assets, the pound and gilts are not out of the woods yet, and the British government has a lot to do to get back credibility”, Jane Foley, Head of FX Strategy, Rabobank said. #British Pound Gains as Govt. Abandons Top Tax Rate Cut
