The Pound Fell Sharply — and There Were Objective Reasons for It

[Ben Graham]

Yesterday, the British pound lost more than 100 points after UK Prime Minister Keir Starmer warned that his government would make tough but fair decisions as part of the upcoming tax-raising budget expected at the end of this month.

The warning came as Chancellor of the Exchequer Rachel Reeves examines dozens of possible tax increases prepared by Treasury officials for November 26. She aims to fill a fiscal gap of up to £35 billion, with potential measures including an exit tax for wealthy Britons leaving the country and higher levies on premium housing.

The market's reaction was instantaneous. The pound sharply fell against major currencies, reflecting investors' concerns about worsening economic prospects. Many fear that tax hikes could slow economic growth and undermine the UK's competitiveness on the international stage. Expectations surrounding the new budget have dealt a heavy blow to the British currency. Investors appear unprepared for new fiscal initiatives, viewing them as a factor that could exacerbate an already challenging economic situation. Keir Starmer's proposals only heightened anxiety, making the prospect of higher taxes seem almost inevitable.

Starmer told Labor Party MPs that the budget would be based on Labor values such as protecting public services, including the National Health Service. "It will reduce our national debt and lower the cost of living," he said.

Meanwhile, Rachel Reeves has set her sights on wealthy Britons as she considers tax options. She wants to take advantage of the downgrade in productivity forecasts issued by the Office for Budget Responsibility, which could deal an additional £20 billion blow to public finances, by simplifying the tax system and making it fairer.

Starmer, who blamed Brexit, the COVID-19 pandemic, and years of austerity under previous governments, stated that the downgrade was even worse than feared. "Faced with this, we will make tough but fair decisions to renew our country and build it for the long term," the prime minister said.

As for the current GBP/USD technical picture, pound buyers need to reclaim the nearest resistance at 1.3035. Only this will allow them to target 1.3065, above which a breakout will be quite difficult. The ultimate target is the 1.3100 level. In the event of a decline, the bears will try to regain control of the 1.3000 level. If they succeed, a breakout of this range would deal a serious blow to the bulls' positions and push GBP/USD down to the 1.2965 low, with a possible move toward 1.2930.

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