Tax Cuts Could Boost Pound Sterling against Euro and Dollar: ING

  • Pound to Euro reference rate: 1.1420
  • Euro to Pound reference rate: 0.8757
  • Pound to Dollar reference rate: 1.25

Above: Prime Minister Rishi Sunak delivers a speech on the economy on Monday 20. Picture by Simon Walker / No 10 Downing Street

The British Pound could receive a boost if tax cuts are announced by the UK government in the Autumn Statement, which is due to be presented to Parliament on Wednesday.

The call comes from analysts at ING Bank, the international lender, who say potential tax cuts could prove "good news" for the Pound.

"Unsurprisingly, as we head into an election year, the UK Chancellor is looking at ways to reduce taxes. The focus this week is on the Autumn Statement, where we think Jeremy Hunt might have around £16bn to play with, given the better fiscal trajectory than expected," says Chris Turner, Head of FX Research at ING.

The Chancellor of the Exchequer, Jeremy Hunt, had previously ruled out cutting taxes, warning such a move could be inflationary. Prime Minister Rishi Sunak appears to have decided to bring forward plans to cut taxes as inflation in October had more than halved since January, according to last week's release of inflation numbers from the ONS.

"Speculation over tax cuts has centred on inheritance tax and perhaps even income tax and national insurance, which would favour workers at the lower end of the income spectrum," says Turner.

ING's UK economist believes these tax cuts won't materially alter UK inflation trends, nor will it "move the needle for the Bank of England rate story, where we think rates have peaked and the BoE will start easing next August."

Cutting taxes could bolster consumer and business confidence while boosting a recovery in real incomes, which would be supportive of the UK's economic outlook and currency.

"Speculation over tax costs in a risk-positive environment should be good news for sterling. GBP/USD can push up to 1.2590, while EUR/GBP can correct back to 0.8700 this week," says Turner. (A EUR/GBP correction to 0.87 gives a Pound to Euro rate of 1.1500.

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The Autumn Statement comes just over a year after the ill-fated 'mini-budget' of former Prime Minister Liz Truss that promised significant tax cuts and spending increases that scared markets into worrying about the UK's financial trajectory.

The worry was expressed via surging UK bond yields and a plummet in the value of the British Pound, confirming that when governments get budget plans wrong, there are significant implications for financial markets.

However, Prime Minister Rish Sunak and Chancellor Jeremy Hunt have proven to be keenly attentive to the sustainability of their fiscal policies, which dramatically lowers the risks of negative market outcomes.

"In no way does it resemble anything like his predecessors Truss and Chancellor Kwarteng announced in their September 2022 mini-budget," says Mathias Van der Jeugt, an analyst at KBC Bank.

Sunak on Monday afternoon delivered a speech in which he effectively prepared markets for some fiscal giveaways.

Sunak said that the government can begin the next phase of his fiscal agenda by turning attention to cutting taxes now that inflation has halved since January.

He said tax cuts will be carefully considered within the framework that debt to GDP will fall in the fifth year of the forecast.