GBP/USD slips near 1.3150 as UK government drops plans to raise tax rates

GBP/USD depreciates as the Pound Sterling weakens amid growing concerns over the UK’s fiscal discipline and political stability.
The UK government has scrapped plans to raise income-tax rates ahead of the November 26 budget.
The US Dollar also declines as economic caution outweighs improved sentiment after the US government shutdown ended.

Akhtar Faruqui FXStreet

GBP/USD retraces its recent gains from the previous session, trading around 1.3150 during the Asian hours on Friday. The pair depreciates as the Pound Sterling (GBP) declines amid rising concerns over fiscal discipline and political stability in the United Kingdom (UK).

The Financial Times reported that the UK government has dropped plans to raise income-tax rates ahead of the November 26 budget. Prime Minister Keir Starmer and Chancellor Rachel Reeves abandoned earlier proposals to increase basic and higher tax bands, choosing instead to pursue less direct revenue measures to address a £30 billion fiscal shortfall.

The British Pound remains under pressure as softer-than-expected economic data have strengthened expectations of a Bank of England (BoE) rate cut in December. The UK economy posted only modest growth in Q3, while September GDP fell on a monthly basis.

The downside of the GBP/USD pair could be restrained as the US Dollar (USD) struggles, with economic caution in the United States (US) overshadowing improved sentiment after the shutdown’s end.

National Economic Council Director Kevin Hassett cautioned that some October data may “never materialize,” as several agencies were unable to gather information during the shutdown. Initial private-sector reports suggest a cooling labor market and wavering consumer confidence, with persistent concerns about inflation. US President Donald Trump signed the government funding bill on Thursday, marking the official end of the record 43-day government shutdown in US history.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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