GBP/USD’s Recovery Set To Fail On Rising US Yields, UK Tax Hikes, Tough Cap

Three in every ten Brits has already received one vaccine dose – but that impressing inoculation rate is already priced into sterling, which needs new catalysts to rise. However, speculation about raising the corporate tax rate in the UK may do the opposite.

Source: The Guardian

Rishi Sunak, Britain’s Chancellor of the Exchequer, is set to present a new budget on Wednesday and pushing up rates that companies pay is high on the agenda, according to hints he made on weekend interviews. Will that make Britain a worse place for doing business? That is something for pound bears may grab on, at least in the short-term. On the other hand, the US is also considering reforming its contribution structure and the UK’s corporate tax is currently low.

A more significant factor that may keep cable capped comes from the US. The dollar stormed higher last week as investors repriced chances for the Federal Reserve to raise rates and/or cut back on its bond-buying scheme.

While Fed Chair Jerome Powell was speaking, markets were relatively calm, but then the levee broke on Thursday. Prospects of stronger growth and perhaps elevated inflation sent traders away from bonds, the resulting higher returns made the greenback more attractive.

The new week and month begin with some calm. However, there is room for US yields to rise due to several factors. First, the ISM Manufacturing Purchasing Managers’ Index will likely show robust expansion in the industrial sector, and also boost expectations for Friday’s Nonfarm Payrolls.

Secondly, the Senate is discussing President Joe Biden’s $1.9 trillion covid relief bill. According to reports, Democrats have abandoned their plans to raise the minimum wage, a thorn on the side for several conservative members of the left-leaning party. That paves the way for a more generous package – only somewhat lower than the original plan – which in turn would raise inflation expectations.

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