Yesterday, Boris Johnson announced a new health and social care tax to pay for reforms to the care sector and NHS funding in England. Its main aim is to fill up the crater-sized hole in finances left by the Covid-19 pandemic.
The pound swiftly tumbled by 0.28% against the euro and 0.40% against the dollar upon the news, trading at 1.163 and 1.378 respectively (correct at time of writing).
It also means that markets’ expectations of the Bank of England’s interest rate hike (currently projected for Q2 2022) is looking way off the mark. Large players price these events in ahead of time, and adjust their currency positions if timelines change.
Furthermore, it could also put a dent in the ‘economic rebound’ narrative that’s been supporting the pound over the past months. A tax on wages (the bill will effectively reduce worker’s take-home pay by 1.2% on average) could hamper the fragile post-pandemic growth.
In other currency news EUR/USD has pulled back, giving up to resurgent dollar demand and trading around the 1.1850 price zone. The next event to look out for is the European Central Bank monetary policy announcement on Thursday.
Have a great day.
Thomas De Caluwé, Relationship Manager.
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