New austerity measures set to weaken UK economy

GBP/USD rose 0.81% to 1.1926, hitting a new high since mid-August to 1.2028. New fiscal austerity measures are expected to weaken the outlook for the UK economy. It plans to save 55 billion pounds a year to repair public finances, almost half of which will come from tax increase.

The U.S. Commodity Futures Trading Commission CFTC foreign exchange non-commercial position report shows that as of 2022-11-15, the (hand) long position of the British pound decreased by 1931 hands to 34699 hands. Sterling pared gains against the dollar and was last up 0.22% after rising as much as 0.70% earlier. Both the euro and sterling hit multi-month highs against the dollar after inflation data showed some easing in U.S. price pressures.

Sterling could struggle early next year, reflecting a mix of external and local factors. On the global front, the outlook for the US dollar will loom large in the volatility of the pound. Expect further divergence in eventual rate policy between the Fed and BoE, especially as UK growth looks vulnerable to housing risks.

Fiscal prudence comes at a price and could dent Britain's growth relative to other G7 nations. In turn, low real interest rates and weak growth will be unable to absorb the capital flows needed to pad current account balances. Britain is the only G7 country whose economy remains smaller than it was before the pandemic.

British Chancellor of the Exchequer Hunt on Thursday announced a budget that includes a series of tax increases and tightening public spending measures. The report outlines about 30 billion pounds of spending cuts and 25 billion pounds of tax increases. Freezing the personal income tax threshold for two years and lowering the top rate of personal income tax to £125,140 - moves that run directly against the deep cuts touted in September's disastrous mini-budget.

The annual exception to the dividend allowance and capital gains tax will be cut for the next two years, the Treasurer said. He also confirmed that the windfall profit tax for the energy industry would be raised from 25% to 35%. At the same time, support for household energy bills will be cut, with typical energy bills rising from £2,500 to £3,000 a year from April 2023. Still, many fiscal measures are planned for years after the 2024 general election.

Along with Thursday's statement, Britain's independent Office for Budget Responsibility (OBR) released a long-awaited series of forecasts that paint a bleak economic picture for the UK. Forecasts show the UK is currently in recession, which is expected to last "just over a year", during which time unemployment will rise from 3.5% to 4.9%. The government's new program ensures a milder recession and lower unemployment than previously expected.

With the UK government launching version 2.0 of tightening policy and the Bank of England rate hike cycle being repriced, GBP/USD tends to return to the 1.10 area by the end of the year. The UK economy is expected to contract every quarter through 2023 - a very difficult environment for the pound. Sterling-dollar volatility is now back to levels seen during Brexit, and expectations for 2023 are for more of this volatility, not less.

GBP/USD daily K-line chart

The momentum of the bulls remains volatile and the upward trend continues. Short-term bullish sentiment emerges, and the bulls continue to rise. The upper suppression focuses on around 1.22020, and the lower support focuses on around 1.15931. As shown in the picture:

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