Pound Plunges To Record Lows After New Tax Cuts

The week starts off with a “risk off” market leading to a surge in the safe haven currency, US Dollar, and a strong decline in almost everything else. One of the main stories this morning is the Pound reaching a new record low! This has brought the question of potential parity before the new year. Parity has never been reached between the GBP/USD and we are still over 500 PIPs away. So far, analysts have advised that it is a possibility but it may be too early to predict. Let's dive deeper into understanding the current price movement and the reasons behind it.

GBP/USD

With regard to price action, we can see that the pair opened the week’s trading with a bearish price gap. This further shows the pressure on the GBP/USD. Since the market opened with today’s Asian trading session, the price has declined by up to 4.30%. As things stand right now, the asset has declined by almost 6.50% since Friday. With regards to indicators, most signals are pointing to a further decline but, at the same time, indicating that the asset is oversold in the short term.

GBP/USD 4-hour chart on September 26th

The price decline had originally been triggered for multiple reasons including the increase in demand for the US Dollar, supply disruptions, the energy crisis, and political instability. However, the latest decline over the past 2 days, which has by far been the strongest, is mostly a result of the Chancellor’s new “growth package” which saw the largest tax giveaway in half a century. Pound’s freefall began shortly after the package was announced on Friday, making it difficult to dispute the cause of the decline.

The package announced by the Chancellor confirmed the cancellation of the planned 25.0% corporate tax increase as well as the 1.25% increase in national insurance contributions. It also cancelled the reduction in the base income tax rate and stamp duty, as well as several other reliefs for businesses and citizens.

According to economists, these measures should support the economy and bring its growth rate to 2.5% in the medium term. However, experts fear that such a significant reduction in the tax burden could lead to an increase in public debt and inflation, which will force the Bank of England to raise rates much more and keep them high for a long time, ultimately putting significant pressure on the economy.

The US Dollar Index currently has increased to 113.91 which is 0.64% higher than today’s price open.

Crude Oil

Friday’s strong decline saw the price of crude oil move out of a recurring price range which had been in place for almost 3 weeks. The decline measured 5.20% and the price continues to drop this morning. So far, by a further 1.74%. The price is currently attempting to break below the previous swing low and renew the price to a 10-month low.

Crude oil 30-minute chart on September 26th

The price has mainly been pressured by fears of recessions, the stalled negotiations with Iran and the West, as well as a stronger US Dollar, which happens to be inversely correlated to oil. However, traders should keep in mind that the large fiscal stimulus packages which are being introduced by “large buyers” such as China, Japan, and now the UK may potentially increase demand if we see stronger economic activity going forward. Also, an escalation in the Ukraine-Russia conflict also has the potential to result in a surge of buyers fearing further supply complications.

Quick Summary:

• GBP/USD reaches a new record low and experiences high volatility.
• UK’s new growth package triggers a declining Pound but no signs of an urgent Bank of England meeting yet.
• The US Dollar Index reached a new high and increased by 0.64% during this morning’s Asian Session.
• Crude oil breaks out of the previous price range and declines by a further 1.74% this morning.