GBP: Policy U-turn

GBP/USD is just enjoying another leg higher on reports that the Liz Truss government will formally reverse its planned abolishment of the 45% income tax bracket. Our UK team feels this move is rather symbolic, being less about the amount of money it will save (low billions) and more about the poor signal it had delivered of ideological (unfunded) tax cuts. The move looks driven by a backlash from her own party and perhaps the threat of a sovereign rating downgrade, where the S&P rating agency on Friday shifted the UK outlook to negative from stable in an unscheduled move.
We will not be churlish here and say this will not affect the pound. Yet cable has today
returned to levels seen just before Chancellor Kwasi Kwarteng delivered the infamous
‘fiscal event’ and it would now be hard to argue that cable should be trading much higher than that. But this does alleviate the risk of cable trading to parity in that it shows Downing Street will show greater respect to financial markets when considering policy options. Maybe we see a new cable trading range of something like 1.1000-1.1350. EUR/GBP may find support under 0.8700 now.

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