The GBP/USD exchange rate has continued its recent rally, as market participants digest the latest autumn budget presented by UK Chancellor Rachel Reeves. Sterling surged to a high of 1.3230, marking its strongest level since October 29.
From this year’s low, the GBP/USD pair has gained 1.65%, reflecting renewed investor optimism in UK assets. This article by Fonds Avenue provides readers with valuable insights and a thorough analysis of the subject.
Rachel Reeves: Tax Hikes and Market Reaction
The recent budget speech by Rachel Reeves introduced significant tax increases, which have had a pronounced impact on the GBP/USD forex market. Analysis indicates that the budget will raise taxes by approximately £40 billion, with the majority allocated to welfare spending and strengthening fiscal headroom against potential economic shocks.
Key elements of the tax hikes include measures on landlords, which are likely to be passed onto tenants, and new taxes on dividends and luxury mansions. While these measures are intended to bolster government revenue, analysts warn that such tax increases could potentially slow the economy and trigger capital flight, creating headwinds for sterling in the longer term.
Interestingly, despite the scale of these tax hikes, UK markets reacted positively in the short term. The sterling gained strength, while UK equities and the bond market also responded favourably. For instance, the ten-year UK government bond yield fell to 4.42% from this week’s high of 4.629%, and the FTSE 100 Index climbed by 0.85%.
A major reason behind the initial bullish reaction is that some of the largest tax measures will only take effect after the next general election, which is due by summer 2029. As a result, investors perceive the measures as future-oriented rather than immediate economic constraints, allowing for short-term gains in GBP/USD and other UK assets.
Market Outlook Amid Low Volatility
With no significant macroeconomic data expected from the US or the UK, the GBP/USD pair is likely to continue reacting to the budget speech rather than underlying economic fundamentals. Additionally, market activity is expected to be muted due to the US Thanksgiving holiday, further reducing volatility in the forex market.
Traders should remain cautious, as the current rally could face resistance in the near term. The GBP/USD may consolidate around its recent highs before any sustained move higher or lower occurs.
GBP/USD Technical Analysis
From a technical perspective, the GBP/USD pair has rebounded from 1.3010, this month’s low, to its current level of 1.3225. The pair is currently testing the upper boundary of a bearish flag channel, a pattern that historically signals potential downside pressure after a short-term rally.
Key technical indicators provide a mixed outlook. The 50-day moving average (MA) shows the pair has moved above this level, signalling short-term bullish momentum. Meanwhile, the 38.2% Fibonacci retracement at 1.3155 has been breached, confirming the recovery from monthly lows.
However, the Ichimoku cloud indicates the pair remains below the cloud, suggesting medium-term resistance, and the Supertrend indicator continues to show bearish signals, which could limit further upside potential until it turns green.
Overall, the technical outlook remains cautiously bearish despite the recent rally. Traders should watch the psychological support level at 1.3100, which is likely to serve as the initial downside target if profit-taking or market correction occurs.
Potential Scenarios for GBP/USD
The GBP/USD pair could follow two main scenarios in the short term:
Bearish Scenario: If the Supertrend indicator remains red and the pair fails to sustain above the 1.3225 resistance, sterling may face a pullback toward 1.3100. This could be accelerated by profit-taking or concerns about future tax hikes and economic slowdown.
Bullish Scenario: If GBP/USD breaks decisively above the current resistance zone and the Supertrend indicator turns green, further gains could materialize, potentially testing the 1.3300 area. Sustained bullish momentum would likely depend on positive market sentiment and continued investor appetite for UK assets ahead of tax implementation delays.
Conclusion
The GBP/USD forex signal suggests that while the post-budget rally has driven sterling to 1.3230, technical resistance and the delayed impact of tax hikes could cap further gains in the near term. Traders should closely monitor technical levels, including the 50-day MA, Fibonacci retracement levels, and Supertrend signals, to anticipate potential pullbacks or further upside.
Overall, the GBP/USD pair remains in a volatile environment, influenced more by political developments and market sentiment than fundamental macroeconomic data, at least until the US returns from the Thanksgiving break. Short-term gains are plausible, but caution is warranted given the bearish signals indicated by technical analysis.
