- The British pound's performance was negatively impacted by the announcement of the UK budget, as the GBP/USD pair plummeted to the support level of 1.2936 before stabilizing around 1.2950 ahead of the release of a batch of influential US economic data.
- Yesterday, British Chancellor Rachel Reeves presented the Labour Party's first budget in 14 years, in what experts described as the UK's largest tax increase in decades.
This comprehensive financial package included large tax increases to address a deficit of 40 billion pounds, as expected. Accordingly, the stock markets responded positively to the announcement, with the FTSE 250 index rising by more than 1% during the session. However, the FTSE 100 index fell by more than 0.5%. In another historical significance, Reeves also became the first Chancellor to announce a budget.
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Ahead of the announcement, Raffi Boyadjian, chief market analyst at XM.com, said: “If markets feel that the corporate tax burden is too heavy and there are not enough measures to boost growth, the pound is likely to fall as this will set the tone for a dovish BoE meeting next week.”
Higher unemployment after the budget could weigh on wages, allowing the BoE to cut interest rates faster. This would weigh on the pound in the medium term. Additional spending could boost the pound’s exchange rate. However, price action over the past few days suggests that the pound is reflecting some optimism among market participants, which is likely to focus on the additional spending that will be announced to fund infrastructure investment.
Here’s a breakdown of the key announcements from Reeves’ budget:
Capital gains tax hike
In a move expected to raise billions of dollars, the government will increase capital gains tax rates. The low rate will rise from 10% to 18%, while the high rate will rise from 20% to 24%. “Even with these changes, our rates remain the lowest in the G7,” Reeves said. Furthermore, the changes are aimed at plugging a gap in government funding while keeping Britain competitive in the global market.
Stamp duty hike
Meanwhile, Reeves announced that stamp duty on rental properties and second homes will rise from 2% to 5% from tomorrow. The increase, which will hit property owners’ finances, is part of Reeves’ plan to address a £22bn deficit in the public finances.
Inheritance tax reform to raise more than £2bn
Also, Reeves unveiled tougher rules on inheritance tax, which are expected to raise more than £2bn. The chancellor has extended the freeze on the inheritance tax threshold until 2030, meaning properties worth up to £325,000, or £1m for married couples with direct descendants, will remain tax-free. From April 2027, inherited pensions will be subject to inheritance tax, closing a loophole left by previous policies.
The government will also reform the agricultural and commercial property exemption. While the first £1 million of agricultural and commercial assets will remain tax-free, assets above this value will be taxed at a 50% exemption, resulting in an effective rate of 20%.
Employers’ National Insurance contributions to rise by 1.2%
Furthermore, businesses in the UK will see higher costs as employers’ National Insurance contributions rise by 1.2 percentage points, taking the rate to 15% from April 2025. The government will lower the secondary threshold from £9,100 to £5,000, creating additional employer contributions for low-paid employees. Moreover, Reeves acknowledged the potential impact on businesses but argued that it was necessary to secure a more stable economy.
Technical forecasts for the GPB/USD pair today:
The general trend for the GBP/USD pair is still bearish and as I mentioned before, the bears will remain in control by moving below 1.3000 until we react to the important events this week. Clearly, the beginning was with the announcement of the British budget yesterday.
Today, the focus will be on the announcement of the US inflation reading preferred by the US Federal Reserve and the number of weekly jobless claims. Tomorrow, the most important thing will be the announcement of the US jobs numbers. Ultimately, breaking the general downward trend according to the performance on the daily chart requires moving above the resistance of 1.3150.
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