FX.co ★ GBP/USD: pound sterling recovers as UK Treasury makes tax cut U-turn

GBP/USD continues to recover lost ground. A week ago, the pound hit 1.0345, its all-time low against the US dollar. However, bears failed to consolidate their success due to further developments in the UK, including political events. Bearish traders also failed to keep GBP/USD below the key level of 1.1000 – at the moment of writing, the pair traded near 1.1200. GBP/USD has moved for almost 1000 points over the week – a very impressive fluctuation for the pair. The situation is obviously abnormal, which begs the question – where will GBP/USD stabilize?

The record high devaluation of the UK currency was caused by political factors and not economic ones. Last week, the UK Treasury presented a new crisis plan, which shocked observers both in the UK and abroad. It attracted scalding criticism from a number of renowned UK economists (including former policymakers of the Bank of England), the Labor Party and some Conservative Party MPs, as well as EU statesmen, policymakers, and numerous international organizations such as the IMF. The pound sterling dived against all major currencies, while the Conservative Party's approval tanked. According to the latest opinion poll by YouGov, 51% of people polled said Liz Truss should resign as prime minister. Furthermore, 55% said that Kwasi Kwarteng, UK Chancellor of the Exchequer, should quit as well. The controversial economic plan was developed under his authority.

Amid this massive outcry, the UK currency steadily began to recover. It became clear that the new UK prime minister made a strategic blunder by agreeing to such massive tax cuts. If Liz Truss tries to push it through, the Parliament will probably try to force her to resign.

12 Tory MPs have already supported a vote against the newly appointed prime minister, Bloomberg reported. They sent letters of no confidence to the 1922 Committee in the House of Commons. The dissenting MPs oppose Liz Truss' energy crisis plan and tax cuts. Michael Gove, former Secretary of State for Levelling Up, Housing and Communities, is reported to be leading the opposition within the Conservative Party.

This has forced the UK Treasure to reverse course, cancelling the plan to scrap the 45% rate of income tax for people earning over £150,000 per year.

The U-turn came after Liz Truss defended her economic plan on Sunday. The prime minister told The Telegraph that she planned to retain the entire package, including the controversial proposal to scrap the 45% rate of income tax.

Liz Truss and Kwasi Kwarteng

Nevertheless, the UK government was forced into a U-turn, suggesting that other planned policy measures by Liz Truss could be reconsidered as well in the near future. There is increasing speculation in the British media that the economic plan blunder could cost the newly appointed Chancellor of the Exchequer his cabinet post. The prime minister is currently standing by Kwasi Kwarteng and denies rumors about his possible resignation. However, she similarly denied during the weekend that her anti-crisis plan could be revised.

Overall, fundamental factors for the UK currency have significantly improved over the past week. The force of the blow sustained by the pound sterling was mitigated by public reaction to the plan both in the UK and abroad. To stabilize the markets, the UK regulator was forced to resume purchases of government bonds and put its plan to sell gilts on hold.

It is now certain that the UK economic plan, which was presented last week, will either be cancelled or significantly revised, giving strong support to the pound sterling.

However, GBP/USD has not yet stabilized at this point. It tested 1.1200 today, but has not managed to settle in this area. Opening long positions should be considered only after the pair breaks above the resistance at 1.1270, the medium band of the Bollinger Bands indicator on the H1 chart. The next upside target for the pair is located at 1.1350, the upper band of the Bollinger Bands on the H4 chart. However, given the recent political events, going long on GBP would be quite risky.