Cable has fallen back below 1.3800 while EUR/GBP has also briefly nudged back above the 0.8600-level as the UK PM Boris Johnson’s tax hike plan continues to weigh. Higher UK rates have encouraged a stronger GBP, but the pound is set to struggle to see further gains, according to economists at MUFG Bank.
See – EUR/GBP: Delta variant risks to provide a selling opportunity around 0.8660 – Credit Suisse
UK government sets out more plans for higher taxes
“The UK government has decided to raise taxes again to provide more short-term funding for the NHS and to help pay for social care as part of long-term reform plans.”
“The higher taxes on employee earnings and employer wage costs could dampen the strength of the economic recovery from the COVID-19 pandemic in the coming years. At the same time, fiscal tightening will ease the need for the BoE to tighten monetary policy.”
“The pound has strengthened so far this year on the back of rising UK rates but further gains in the coming months are likely to prove more challenging.”
“It will be difficult for GBP/USD to break above resistance at 1.4000 and for EUR/GBP to break below support at 0.8500.”
“The balance of risks for the pound could be starting to shift more to the downside as well. If evidence starts to build that the UK recovery is slowing more than expected and with higher taxes on the way, it would encourage market participants to scale back BoE rate hike expectations.”
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