Dollar Static, Sterling Gains After U.K. Government’s Tax U-Turn

The U.S. dollar edged higher in early European trading Monday, while sterling also gained after the U.K. government agreed to water down its plans for unfunded tax cuts.

At 02:45 ET (06:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, edged higher to 112.13, close to the one-week low of 111.64 seen late last week.

GBP/USD climbed 0.3% to 1.1188 after the British government decided to reverse the proposed scrapping of the highest rate of income tax, a plan that has been widely criticized in the governing Conservative Party as well as the country as a whole.

New Finance Minister Kwasi Kwarteng announced his plan to substantially cut taxes, including the 45p highest rate of income tax, as part of a mini-budget on Sept. 23. 

The need for vast government borrowing to pay for the plan resulted in the value of the pound and government bonds slumping dramatically.

Prime Minister Liz Truss attempted to defend the plan in the press over the weekend, but her pleas didn’t work with several senior lawmakers voicing their opposition to the policy at the party’s annual conference which began on Sunday.

“We get it, and we have listened,” Kwarteng said Monday, confirming that the abolition of the 45p tax rate will not go ahead.

Elsewhere, EUR/USD fell 0.1% to 0.9796, after an escalation of the region’s energy crisis, with Russian energy Gazprom freezing its gas flows to Italy over the weekend.

The European Central Bank is expected to announce another hefty interest rate rise later this month after data on Friday showed that Eurozone inflation beat forecasts, climbing to a record high of 10.0% in September.

The German manufacturing PMI release is due later in the session, and this could show that this important sector in the Eurozone’s economic powerhouse has fallen further into contraction.

USD/JPY rose 0.1% to 144.95, just under the psychologically-important 145 line which could prompt Japanese officials to step in again after they conducted their first yen buying intervention since 1998 last month.

Japanese Finance Minister Shunichi Suzuki stated that Japan stood ready for “decisive” steps in the foreign exchange market if excessive yen moves persisted.

The risk-sensitive AUD/USD rose 0.5% to 0.6436 and NZD/USD climbed 0.9% to 0.5643, with both the Reserve Bank of Australia and the Reserve Bank of New Zealand expected to hike their benchmark interest rates by 50 basis points this week.

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