Jeremy Hunt promises to plug UK budget hole

The pound decreased significantly on Thursday, but recovered lost ground at the end of the day and rose during the Asian session on Friday on positive macroeconomic data from the UK. Yesterday the Chancellor of the Exchequer Jeremy Hunt exposed the grim new reality of the British economy. The UK economy has been in dire straits recently and will continue to suffer from weak growth and tax hikes for years to come.

Due to the recession, investor skepticism, and the sharpest decline in living standards in 66 years, Hunt said he would need about £55 billion in taxes, as well as major spending cuts in an attempt to stabilize public finances. The pound went down in response. However, the Treasury postponed the implementation of its austerity plan for two years to provide some support for the troubled economy and Prime Minister Rishi Sunak's ruling Conservative Party.

Hunt also announced an additional £300 billion in loans over the next five years, which, combined with a sharp rise in interest rates, will have dramatic consequences. Statistics show that this year alone, the UK's debt interest costs will be £120 billion. That amounts to 5% of the GDP and 12% of government revenues. Experts note that the UK has not had such a debt burden since records began in 1956.

Despite this, the latest data showed that consumer confidence in Britain increased for a second consecutive month after Prime Minister Rishi Sunak began working hard to stabilize the economy after the disastrous and short tenure of his predecessor, Liz Truss. According to GfK Ltd. the sentiment index rose three points to -44 in November. However, the index remained near the record low of -49 recorded in September 2022, when Truss' mini-budget plan caused panic in financial markets and led to the pound collapsing by more than 10% in a matter of days.

The rise in the indicator reflects nothing less than a collective sigh of relief as new PM Rishi Sunak took charge and promised to fix the economy after the troubling fiscal turmoil seen in September. Needless to say, the consumer confidence indicator is well below the level of a year ago, reflecting a spike in food and energy prices that is lowering living standards and driving the economy into recession. GfK said consumers are still under pressure from rising interest rates, tax deductions and rent payments.

On the technical side, GBP/USD has stopped and seems to have taken a pause. Buyers are focused on defending the support at 1.1850 and on breaking the resistance at 1.1950, which limits the upside potential. Only a breakout above 1.1950 will make a recovery to 1.2020 more likely. Then the pound may rise sharply into the 1.2080 area. GBP/USD will come under pressure if bears take over 1.1850. This would be a blow to the bulls' positions and would cancel out the prospects of the bull market. A break below 1.1790 would push GBP/USD back to 1.1740.

As for EUR/USD, the market is still somewhat confused. It is obvious that demand for risky assets has significantly decreased, but there is no sign of bearish traders right now. For further growth EUR/USD needs to break above 1.0380, which will push the instrument into the area of 1.1440 and 1.0480. The pair could then easily climb to 1.0525 and 1.057. If EUR/USD declines and breaks below the support level of 1.0330, it will push the pair back to 1.0270 and increase pressure on the instrument. From there, it could fall to the low of 1.0220.