Pound US Dollar Exchange Rate News: GBP/USD Wavered after Truss U-Turned on Tax Cuts

October 3, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Wavered after Truss U-Turned on Tax Cuts

Pound (GBP) Boosted as Government Abandons Controversial Tax Cut Plans

The Pound (GBP) recovered modestly on Monday as Prime Minister Liz Truss announced a dramatic U-turn on top-rate tax cut.

In the wake of criticism and a market meltdown, the UK government have decided to go back on their plan to slash the 45p top rate of income tax. The Chancellor Kwasi Kwarteng, who laid out the decision in his mini-budget, has said that the tax cuts for the wealthiest earners will not go ahead. He said:

‘(The tax cuts have) become a distraction from our overriding mission to tackle the challenges facing our country. As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate.

‘We felt that the 45p issue was drowning out a strong package of intervention on energy, a strong package of intervention on tax cuts for people generally.’

However, despite a brief spike in demand in the wake of the U-turn, the Pound is not out of the woods just yet. George Lagarias, Chief Economist Mazars, has said that the reversal of the tax cut plan would relieve some pressure from Sterling but warned that UK credibility is still damaged. Lagarias added:

‘Still, the UK has lost some credibility with international markets over the past few years. Despite the Pound’s currency reserve status, British risk assets have a long and difficult way before they return as a staple in the portfolios of international long-term investors.’

Meanwhile, capping any further gains is the printing of worse-than-expected manufacturing PMI. The reading was lower than the preliminary estimate and showed a second consecutive month of deterioration in the manufacturing sector. Against earlier estimates of a 48.5, manufacturing PMI declined to 48.4.

US Dollar (USD) Underpinned by Bullish Sentiment

The US Dollar (USD) continued to maintain its strength across the board as a hawkish Federal Reserve keeps the ‘Greenback’ afloat.

As Fed speakers continue their stance on tackling inflation, markets are expecting another bumper 75bps rate hike at the next policy meeting in November. Accompanied with a resilient labour market and a strong economy, the Fed is confident of continued rate hikes.

Federal Reserve Vice Chair Lael Brainard said on Friday that the central bank is committed in reining in inflation and will not stop until the task is finished. Brainard added:

‘Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For these reasons, we are committed to avoiding pulling back prematurely.’

Meanwhile, a relatively stable financial markets, especially with a relatively positive tone around US equity markets, could be keeping a lid on any significant gains.

However, investors will be keeping a keen eye on further developments out of Ukraine. With Putin formally annexing several regions of Ukraine, global market sentiment could waver if tensions escalate further. If any further negative news was to come out, safe-haven flows could bolster the ‘Greenback’.

GBP/USD Exchange Rate Forecast: US Manufacturing to Bolster the US Dollar?

Looking ahead, and the Pound US Dollar exchange rate could see further movement if US manufacturing PMI prints to forecast. Expectations of 52.8, although still expanding, highlight the lowest levels of factory growth not seen since the height of the pandemic in June 2020.

Meanwhile, no further data for the Pound could see it exposed to market sentiment. Despite the U-turn in tax cut plans, investors’ confidence in the UK economy could continue to weigh heavily on Sterling.

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