Pound Sterling weakens as UK mulls avoiding tax hikes in budget

The Pound Sterling (GBP) underperforms on Friday, paring back all the gains seen a day earlier, and looks set to end the week slightly in the red. The British currency trades lower against its peers as United Kingdom (UK) fiscal risks have escalated, following reports from the Financial Times (FT) signaling that Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves might scrap their plans of raising basic and higher tax bands in the upcoming Autumn Budget on November 26.

The FT reported that the UK government could avoid raising the burden on individuals and look for other non-direct revenues to cover the £30 billion fiscal gap.

A few weeks ago, Reeves stated that the administration might need to ditch its election manifesto’s promise of not hiking households’ taxes to fund the stopgap bill.

The absence of tax hikes could prompt fiscal debt risks by increasing interest obligations on the government’s debt. At the time of writing, 10-year UK gilt yields are trading 0.8% higher, near 4.40%.

Daily digest market movers: Pound Sterling underperforms US Dollar

• The Pound Sterling trades 0.4% lower to near 1.3130 against the US Dollar (USD) during the European trading session on Friday. The Pound Sterling remains on the back foot, while the US Dollar is also under pressure as investors turn cautious ahead of the publication of key United States (US) economic data releases that were halted due to the government shutdown.
• At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges lower to near 99.15, close to a two-week low of 99.00 posted on Thursday.
• The US Bureau of Labor Statistics (BLS) said that it will publish the updated schedule of delayed economic data on its website soon. The release of the US economic data would significantly influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
• On Thursday, White House Economic Council Director Kevin Hassett said in an appearance on Fox News that the upcoming labour data release won’t include the Unemployment Rate data.
• Meanwhile, traders have trimmed Fed dovish bets for the December policy meeting as a slew of policymakers have warned of upside inflation risks. “The Fed needs to proceed with caution now, and continue to lean against inflation,” St. Louis Fed President Alberto Musalem said on Thursday.
• In the UK, intensifying expectations of an interest rate cut by the Bank of England (BoE) for the December policy meeting are also being a drag on the Pound Sterling. BoE dovish bets have accelerated following weak employment data for three months ending September and the flash Q3 Gross Domestic Product (GDP) data. The ILO Unemployment Rate jumped to 5%, while the economy expanded by a marginal 0.1%.
• Next week, investors will focus on the UK Consumer Price Index (CPI) data for October, which will be released on Wednesday.

Technical Analysis: Pound Sterling stays below 200-day EMA

The Pound Sterling declines to near 1.3130 against the US Dollar on Friday. The overall trend of the pair remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3276.

The 14-day Relative Strength Index (RSI) struggles to stay above 40.00. A fresh bearish momentum would emerge if the RSI resumes its downside journey.

Looking down, the April low near 1.2700 will act as a key support zone. On the upside, the October 28 high around 1.3370 will act as a key barrier.

(This story was corrected on November 14 at 08:30 GMT to say, in the second bullet, that weak economic data from the UK, not the US, has supported BoE dovish bets. It was also corrected to say that the next Federal Reserve meeting will be in December, not in October.)