Forex Analysis - How will Pound Sterling react to the UK Budget?

TigerWit Africa

On Wednesday, the UK Chancellor of the Exchequer (Finance Minister) will reveal the country’s latest budget. Traders and investors, among many other things, would like to check a likely tax hike, especially for corporations and big investments.

The UK’s debt profile has surged since the pandemic, as so for other countries. The government is indebted by over GBP 2.11 trillion in January having dropped from December’s 2.131 trillion. Despite the big debts, as a result of the pandemic, the government might feel the need to continue spending to revive the economy. The country got struck down by new variants of the virus in December followed by lockdowns in most of January and February. However, massive vaccination has stabilized and cut down the virus impact. UK is now more vaccinated per 100 compared to the US and far ahead of the Euro-zone.

With the positive vaccine outcome, the UK economy will be completely reopened by June and sustainable recovery is expected by December. However, despite the upbeat outlook, Rishi Sunak is expected to announce further spending measures today to quicken the recovery. The UK unemployment rate has hit an unenviable 5.1% (3 million unemployed citizens). In fact, the country’s jobless rate has been increasing since July 2020 after a steady 4-4.1% between February and June 2020. Spendings will most likely be in form of relief packages for smaller businesses and the extension of their furlough program to revive the job market.

Will the UK raise the corporate tax rate?

In today’s budget reading by 12:30 GMT, traders and investors will get to know about the spending plan. But more important fact is at whose expense – the country’s debt book or corporations or both? Speculations are widespread that the Minister might raise the corporate tax toward 23% from 19% to cut down debt. However, this is far from realistic. At this time, the worst the government can do is discourage investors with a tax hike. Exit of corporate businesses would mean loss of jobs which will be irresponsible. While a tax hike could still happen, it would have to be postponed until the current crisis is over. The government will have to absorb all the deficit and hope recovery happens as soon as hoped.

GBPUSD technical analysis

GBPUSD (30 Mins Chart)

On 24th February, the Cable had its biggest and sharpest fall in 2021. The price fell from 1.424 to 1.386 in what is clearly a bearish impulse wave pattern. Last week dollar resurgence has been the biggest driver of this move. However, a recovery is in progress as the dollar shed some profits. A 3-wave corrective bounce is therefore expected to the 50-61.8% Fibonacci retracement at 1.405 and 1.4095 respectively. Afterward, the bearish decline might continue to 1.375 or below.

EURGBP technical analysis

EURGBP (Daily Chart)

GBP continues to maintain a positive outlook against the Euro. The political instability in Italy and a sluggish start to vaccination in the Euro-zone put much pressure on the Euro for most of January and February. On the other hand, the UK has encouraged investors with its massive vaccination after the Brexit triumph brightened the mood at the turn of the year.

The result of this is the Euro shedding 4-5% against the British Sterling. The EURGBP pair, however, completed a bullish engulfing pattern around a critical support zone last week. The follow-up reaction hasn’t been sufficiently optimistic. The bulls might resist further rallies at the 0.8730 resistance level while the bear could halt further decline below the 0.86 psychological level. An eventual breach of any of these levels could determine the near-term direction. However, overall, the larger trend remains bearish from both technical and fundamental outlook.

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