British Prime Minister's tax cut plan triggers market turmoil, pound and US continue to be under pressure

The continuous rise of the dollar has suppressed the pound. The pound is largely affected by the fluctuation of the dollar. After the British Prime Minister Truss came to power, he launched the "strongest" tax cut plan, which caused market panic. Sterling's decline is unlikely to reverse the GBPUSD 1.1324-0.01% until UK growth rebounds.

The U.S. Commodity Futures Trading Commission CFTC foreign exchange business position report shows that as of the week of 2022-10-11 (hand) GBP long positions decreased by 12,119 lots to 179,700 lots; GBP/USD fluctuated and rebounded this week, but the strong dollar suppressed the rise in GBP, The UK bond market crisis and a strong dollar have always put pressure on the pound.

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Bank of England chief economist Huw Pill expects a "significant" change in UK interest rate policy next month in response to the government's fiscal plans. In his view, the UK government's "growth plan" and its support for the Household and Business Energy Bill will increase inflationary pressures in the medium term.

The UK government's energy package effectively diverts the main macro risk from rising gas prices away from headline inflation, putting more pressure on the fiscal deficit in turn. It is crucial to ensure that the shift and other UK government tax measures do not have an impact on the long-term sustainability of public finances or on the broader institutional framework for macroeconomic policy.

Chancellor of the Exchequer Hunt: We are facing some very difficult decisions. Countries and markets need stability. We have to prove that we can afford the tax and consumption. People need to look at stable government. In calling for the tough decision to cut taxes for the wealthiest, we err. Government departments will have to be more efficient. Tax cuts won't be released so soon, some taxes will increase.

"What I want to cut is the corporate tax cut, but what we're doing doesn't give people confidence," Hunt said. The policies we are announcing in the coming months will bring tremendous growth potential. The basic strategy behind the Prime Minister is absolutely correct. Truss and Quarten's plan didn't work. The government should monitor and forecast tax plans. We're not talking about a return to 2010 levels of austerity.

In September this year, after the UK announced the largest tax cut plan in 50 years, the UK pension fund experienced a liquidity crisis, and long-term government bonds were sold off. , which also gave the pound a brief recovery in late September and early October.

However, the turmoil that swept the British government bond market continued. On October 10, the British bond market suffered another violent sell-off. Just as the bond market crisis intensified, the Bank of England immediately launched new measures to stabilize the financial market on October 10. Including a series of measures such as increasing the intensity of bond purchases, and including inflation-linked government bonds into the scope of purchase, "overweight" to save the market.

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After abandoning the plan to cancel the top income tax rate on October 3, the British government made major policy adjustments under continuous pressure on the 14th. British Prime Minister Elizabeth Truss announced on the same day that it would retain the corporate tax hike plan announced by the previous government, which will bring the government 18 billion pounds (1 pound about 1.118 US dollars) in revenue every year.

British Prime Minister Truss on Friday (October 14) sacked Chancellor Kwarteng, who had been in office for less than six weeks. At the same time, the British government withdrew some of the overly aggressive tax cuts. Nonetheless, the pound exchange rate and British government bond prices remained under pressure on the day. Analysts at Citi pointed out that the mini-budget announced by former finance minister Kwarteng on September 23 certainly roiled financial markets. But investors are more worried about the British government's indecisive stance on economic policy, which has further increased market uncertainty. Only when Prime Minister Truss is also ousted can peace be finally restored to bond markets.

Fitch: Sterling money market fund inflows rose sharply during the recent gilt volatility, with sterling money market funds peaking at 17% of AUM on Sept. 30, compared to a "usual level" of 5%

GBP/USD daily candlestick chart

The low-level bulls are waiting for an opportunity to enter the market in the short term, and the follow-up power is insufficient, and the low-level and wide-ranging fluctuations are entangled. The top suppression is about 1.14777, and the low-level support is about 1.07108. As shown in the figure:

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