GBP/USD struggles as tax hike worries mount

• Chancellor Reeves could be forced to hike rates in the Autumn Budget
• USD struggles as trade tariff jitters return
• GBP/USD remains in a longer-term uptrend, but momentum has slowed

The pound is struggling around 1.3650 at the end of a volatile week amid concerns over the health of the government's finances.

The UK government's borrowing costs jumped on Wednesday, and the pound plunged amid concerns that Rachel Reeves would be replaced with someone less committed to the government's fiscal rules.

The bond market turmoil calmed on Thursday, and the pound steadied after Keir Starmer backed the chancellor. However, the recent government U-turn on welfare reforms suggests that it's politically too difficult to cut spending, and the Chancellor's headroom has now evaporated.

As a result, the government may need to hike taxes in the autumn budget. A tax hike works by depressing demand and is considered a deflationary measure, which means the Bank of England may need to cut interest rates more aggressively to support the economy.

Currently, the market is expecting two more rate cuts from the Bank of England this year. Should tax hike expectations rise, GBP could come under pressure.

The US dollar is edging lower against its major peers, failing to hold onto yesterday's gains following the stronger-than-expected nonfarm payroll report.

The stronger-than-expected headline job creation and unexpected fall in unemployment have failed to sustain a rise in the dollar. Instead, attention is turning to next week's Trump trade tariff announcements expected.

Trump said the letters will be sent out in the coming days to trading partners, advising them of the import tariffs. He added that these could be between 10% to 70%, making the forex market jittery. High tariffs could prompt a return to the sell America trade.

Meanwhile, Trump got his signature tax cut bill over the line, which is also weighing on the US dollar as it's expected to add an estimated $3.4 trillion to the national debt.

GBP/USD - forecast technical analysis

GBP/USD is struggling around 1.3650, having fallen back from its almost 4-year peak of 1.3790. The pair remains in its rising channel, but momentum is slowing.

Resistance can be seen at 1.37, and a rise above 1.3790  is needed to create a higher high.

Support can be seen at 1.36, the weekly low,  the 20 SMA and the lower band of the rising channel. A break below here opens the door to 1.3450.  A break below here creates a lower low, changing the structure of the chart.