Here’s a shocking truth: the Pound Sterling is taking a hit, and it’s all because the UK might be backing away from tax hikes in the upcoming budget. But here’s where it gets controversial—while this move could ease the burden on households, it might also deepen the country’s fiscal debt crisis. Let’s break it down.
On Friday, the Pound Sterling (GBP) stumbled, erasing all gains from the previous day and ending the week in the red. The currency weakened against its peers as reports emerged that Prime Minister Keir Starmer and Chancellor Rachel Reeves are considering ditching plans to raise basic and higher tax bands in the Autumn Budget on November 26. According to the Financial Times, the government might explore alternative, non-direct revenue sources to plug a £30 billion fiscal gap instead of increasing taxes on individuals. And this is the part most people miss—while avoiding tax hikes might seem like a win for households, it could lead to higher interest obligations on government debt, potentially exacerbating fiscal risks.
A few weeks ago, Chancellor Reeves hinted that the government might abandon its election promise of not raising household taxes to fund emergency measures. Meanwhile, the absence of tax hikes has already pushed 10-year UK gilt yields up by 0.8%, hovering near 4.40% at the time of writing. This raises a critical question: Is the UK trading short-term relief for long-term financial instability?
In the markets, the Pound Sterling traded 0.4% lower against the US Dollar (USD) during Friday’s European session, struggling near 1.3130. The USD itself faced pressure as investors grew cautious ahead of key US economic data releases delayed by the government shutdown. The US Dollar Index (DXY) dipped to near 99.15, close to a two-week low of 99.00. The Bureau of Labor Statistics (BLS) has promised to release an updated schedule for the delayed data soon, which could significantly sway expectations for the Federal Reserve’s monetary policy.
Here’s where it gets even more intriguing—White House Economic Council Director Kevin Hassett revealed on Fox News that the upcoming labor data release will exclude Unemployment Rate figures. Meanwhile, traders have scaled back dovish bets on the Fed’s December meeting, as policymakers warn of persistent inflation risks. St. Louis Fed President Alberto Musalem emphasized, ‘The Fed needs to proceed with caution now and continue to lean against inflation.’
Back in the UK, the Pound is also weighed down by growing expectations of a Bank of England (BoE) interest rate cut in December. Dovish bets on the BoE have surged following weak employment data for the three months ending September and a lackluster Q3 GDP growth of just 0.1%. The ILO Unemployment Rate jumped to 5%, adding to the pressure. Next week, all eyes will be on the UK’s October Consumer Price Index (CPI) data, due Wednesday, for further clues on monetary policy.
From a technical standpoint, the Pound Sterling remains in a bearish trend against the USD, trading below the 200-day Exponential Moving Average (EMA) at around 1.3276. The 14-day Relative Strength Index (RSI) is struggling to stay above 40.00, suggesting a potential resumption of downward momentum. Key levels to watch include the April low near 1.2700 as support and the October 28 high around 1.3370 as resistance.
Now, let’s spark some debate—Is the UK government making a wise move by avoiding tax hikes, or is this a risky gamble that could backfire? And how will the BoE’s potential rate cut impact the Pound’s trajectory? Share your thoughts in the comments—we’d love to hear your take!
For context, Gross Domestic Product (GDP), released by the Office for National Statistics, measures the total value of goods and services produced in the UK. The QoQ (Quarter-on-Quarter) reading is a key indicator of economic health, with higher values typically boosting the Pound and lower values weighing it down. To dive deeper into these economic dynamics, check out the full analysis here.
