GBP/USD Forecast: Fiscal measures not enough to support British pound

GBP/USD has staged a modest rebound toward 1.1200 after having slumped to its weakest level since 1985 near 1.1150. The British government had unveiled an expansive program of tax cuts to support the economy but the positive impact of this development on the pound seems limited for now.

On Thursday, the Bank of England (BoE) announced that it raised its policy rate by 50 basis points (bps) to 2.25%. Since futures markets were pricing a strong probability of a 75 bps hike, the initial market reaction forced GBP/USD to come under bearish pressure. In its policy statement, "UK energy price guarantee will significantly limit further inflation rises, support demand relative to august forecasts," the BoE noted.

At the time of press, futures markets are pricing in a nrealy-60% probability of a 50 bps BoE rate hike in early November.

Earlier in the day, the data from the UK showed earlier in the day that the business activity in the private sector continued to shrink in early September with S&P Global Composite PMI dropping to 48.4 from 49.6 in August.

Meanwhile, UK Finance Minister Kwasi Kwarteng announced on Friday that the government will cancel the planned increase in corporation tax to 25% and that they will leave it unchanged at 19%. Additionally, Kwarteng said that they will abolish the additional rate of income tax. In order to make up for the loss of tax income, the UK is planning to sell £193.9B worth of gilts this fiscal year, compared to the earlier estimate of £192B.

In case the fiscal measures have the desired impact on activity and help the UK economic outlook improve, the BoE could afford to stay on an aggressive tightening path and that should help the British pound. The market positioning, however, doesn't yet confirm that view. The BoE will keep a close eye on inflation and base its decisions on price developments. 

In the second half of the day, S&P Global will release the Manufacturing and Services PMI data for the US. It's worth noting that US stock index futures are down between 0.6% and 0.9%, suggesting that the pair could have a hard time gathering recovery momentum in case safe-haven flows dominate the markets in the second half of the day.

GBP/USD Technical Analysis

GBP/USD continues to trade within a descending channel but the Relative Strength Index (RSI) indicator on the four-hour chart holds below 30, suggesting that the pair could stage a technical correction before the next leg lower.

On the upside, 1.1200 (psychological level, former support) aligns as initial resistance ahead of 1.1250 (static level) and 1.1300 (psychological level, 20-period SMA).

Supports are located at 1.1150 (multi-decade lows), 1.1100 (psychological level) and 1.1050 (lower limit of the descending channel).