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When Kwasi Kwarteng announced last week that the UK government’s plan to abolish the 45% income tax rate in the UK had been shelved, the new chancellor of the exchequer did not just provide yet another reminder that a week – or to be precise, 10 days – is a long time in politics. He also relieved some of the pressure on a currency that had touched record lows.
We expect that the Fed won’t be able to go much further with tightening
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But with prime minister Liz Truss digging her heels in over the other tax cuts included in the UK’s recent mini-budget, sterling remains under intense pressure. JPMorgan reckons that in the absence of a change in government policy, interest rates will likely need to validate market pricing of 6% to preclude further pronounced weakness in GBP.
While the UK government’s decision not to consider any more tax cuts until a new budget in 2023 has given the market some short-term confidence, other policies to be announced in its new fiscal plan – which was originally planned for November 23 but is now expected to come sooner – could undo any hawkishness that the Bank of England (BoE) had planned, according to Charlotte Hampshire-Waugh, global head of trading payments and FX at StoneX Financial.
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