GBP/USD Outlook: UK Government Retreats on Proposed Tax Cuts

• The UK government has abandoned plans to reduce the highest income tax rate.
• The BoE was forced to buy bonds after investors lost trust in the British government.
• BoE’s intervention has seen the pond recovering most of its losses.

Today’s GBP/USD outlook is bullish. On Monday, the administration of British Prime Minister Liz Truss was compelled to make an embarrassing U-turn, abandoning plans to reduce the highest rate of income tax. This tax cut proposal caused a lot of market turmoil. The pound has made up all of its losses against the dollar since Kwarteng presented the mini-budget.

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On September 23, Truss and her finance minister Kwasi Kwarteng unveiled a new “growth plan” that would reduce taxes and regulations and be financed by significant government borrowing to revive the economy after years of poor development.

However, the plan led to a crisis of confidence in the government, which severely impacted the pound’s value and the prices of government bonds while also shaking up the world markets. As a result, the Bank of England was forced to step in with a 65 billion pound ($73 billion) program to settle the gilt market.

“It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country,” Kwarteng said.

“As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.”

Less than four weeks after taking office, the decision to change course is expected to put Truss and Kwarteng under tremendous pressure.

GBP/USD key events today

Investors are awaiting speeches from FOMC and BoE policymakers that will contain clues on future monetary policy. They will also pay attention to the ISM manufacturing PMI from the United States.

GBP/USD technical outlook: Bulls eyeing 1.1503 on stronger momentum

The 4-hour chart shows the price trading above the 30-SMA and the RSI above 50. Undoubtedly, the pound has recovered its recent losses and is in a new uptrend. This uptrend started when the price broke above the 30-SMA and 1.0901 resistance level.

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Since then, buyers have pushed the price to 1.1202, which is also proving difficult to break. The price consolidates below this resistance level but should soon break above and head for 1.1503. It might also retest the 30-SMA before it goes higher.

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