- The British government’s spin on tax cuts boosted the British pound on Monday.
- The Dollar Index was in negative territory below 112.00.
- The dollar came under renewed selling pressure after the ISM PMI data.
After the strong rally seen in the early European morning, the pair GBP/USD remained in a consolidation phase near 1.1200 before gaining momentum in the American session. The pair last traded at its highest level in 10 days at 1.1310, up 1.35% on the day.
Reports suggesting that UK Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng would backtrack on cutting income tax to a higher rate led to a sharp drop in gilt yields. UK and provided a boost to the British pound earlier in the week. After Kwarteng confirmed reports saying that “we are not going to proceed with the abolition of the 45 pence tax rate. We understand and have heard”, the pair held despite modest dollar strength.
In the second half of the day, the ISM Manufacturing PMI weighed on the dollar and opened the door for a prolonged GBP/USD recovery.
Although the main PMI came in above 50, the Employment Index fell to 48.7, revealing a contraction in manufacturing jobs ahead of Friday’s September non-farm payrolls data. Also, the Prices Paid Index fell to 51.7 from 52.5 in August. Weakening input inflation and declining employment in the sector prompted investors to reassess the outlook for Fed policy, and the likelihood of a 75 basis point rate hike, according to CME Group’s FedWatch tool. , fell to 50. Reflecting broader dollar weakness, the Dollar Index last lost 0.4% on the day to settle at 111.73.
Later in the session, Kansas Fed President Esther George and New York Fed President John Williams will deliver speeches.
Technical levels to consider
Source: Fx Street
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