The pound finds support following tax cut U-turn
Daily Currency UpdateThe pound rallied yesterday after the government said it was making a U-turn on a controversial tax cut plan in its mini-budget. Last week Chancellor, Kwasi Kwarteng, said the government would not scrap the country's top income tax rate, but this decision has now been reversed. GBP gained over a cent to above $1.13, recovering its losses since Kwarteng’s unfunded tax cuts spooked markets. It’s also up a euro cent at €1.15 for the first time since just before the mini-budget.
The financial markets also lowered their expectations for UK interest rate hikes. Rates are now expected to hit 5.5% next summer, which is very painful for borrowers, however, this is lower than the 6% expected last week.
Energy regulator Ofgem has warned that Britain is at “significant risk” of gas shortages this winter because of Russia’s war in Ukraine and undersupply in Europe, which could mount more inflationary pressure on top of what is already high levels at 9.870% year over year (compared to 10.101% for the previous month).
Key MoversAnother sign that the global economy is slowing, US manufacturing activity grew at its slowest pace in nearly two and a half years in September. The latest survey of purchasing managers from the Institute of Supply Management found that new orders contracted, as demand for goods was hit by rising interest rates.
The ISM’s manufacturing PMI dropped to 50.9 this month, the lowest reading since May 2020, from 52.8 in August. That’s closer to the 50-point mark, showing stagnation. The report also found that prices were increasing at a slower rate, which may be a sign that the surge in US inflation is abating. But with employment levels also contracting, and exports down, it adds to evidence of a slowdown. Following this release, the euro rose 0.3% against the US dollar to $0.9825.
- GBP/USD: 1.1355 - 1.1415 ▲
- GBP/EUR: 1.1505 - 1.1575 ▲
- EUR/USD: 0.9855 - 0.9895 ▲