Boris Johnson's historic tax hike hurts the Pound

Boris Johnson unveiled a 1.25% NI hike which could hurt the fragile economic recovery. The Pound trades at 6 week lows versus the Euro and is falling for the third straight session versus the USD.

Brexit 1

Yesterday British Prime Minister Boris Johnson unveiled plans to hike taxes on workers and employers in order to fix the health and social care funding plans. 

What will the money go on? 

Following huge spending across the pandemic Boris Johnson is now turning his attention to Britain’s social care system. As the UK population ages over the coming decades costs in this sector are expected to surge.  

The PM is also looking to tackle the enormous waiting lists in Britain’s healthcare system after resources were focused on tackling covid across the past 18 months. 

How much? 

Ignoring uproar in his party, the PM outlined a 1.25% rise in National Insurance taxes paid by both workers and employers, as well as a 1.25% tax increase in shareholder dividends. This would raise £36 billion over 3 years. The UK will also have it largest ever peacetime tax burden at 35% of GDP. 

Outlook for sterling 

The Pound has been a strong performer across the year thanks to the rapid vaccine programme and fast economic rebound. However, concerns are rising that momentum is slowing amid the impact of Brexit, global supply chain issues and as covid cases start to rise again. Now add to the mix a higher tax burden and individuals and business could struggle to prosper. And let’s not forget that the furlough scheme is also due to expire at the end of the month. The outlook is starting to look considerable bleaker. 

Meanwhile the US Dollar is finding its feet on safe haven flows. Concerns over the global economic recovery have seen equities tumble and the US Dollar rise. Goldman Sachs downgraded the US growth forecast for the second time  over the weekend.

GBP/USD reaction 

The Pound is less than impressed with Boris Johnson’s plans. Sterling trades at a six-week low versus the Euro. GBP/USD trades lower for the third straight session. GBP/USD trades below its 50 & 200 sma with the 50 crossing below the 200 sma in a death cross bearish signal.  

The pair has broken below its multi-week ascending channel, whilst also falling back below the multi-month descending trendline. 

The receding bullish bias on the MACD suggests that there could me downside on the cards. 

Should the sellers take out the day’s low at 1.3750 the September low of 1.3731 comes into focus and 1.37 the round number. 

On the upside, a close above 1.3790 the falling trendline resistance and the lower band of the rising channel could see buyers become more optimistic and aim for 1.3890 the September high. 

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