GBP/USD still seen at 1.04 despite UK policy U-turn – Rabobank

GBP/USD is higher after the UK government is expected to roll back the proposed scrapping of the higher rate of income tax. Still, the pound remains a very vulnerable currency, according to economists at Rabobank.

The pound is far from out of the woods

“The cost to the Exchequer of scrapping of the top tax rate would have been in the region of GBP2 bln, which is modest part of the GBP45 bln package that was announced on September 23.”

“It remains the case that the gilt market is being supported by the BoE’s extraordinary intervention. This is scheduled to end on October 14 and will leave the market exposed to the weight of extra gilt issuance during the coming fiscal year. In addition, the Bank is still planning to go ahead and start QT at the end of this month, though there is widespread speculation that this will not happen.”

“We still retain a three-to six-month target for cable at GBP/USD 1.04.”