21.08.202510:48 Forex Analysis & Reviews: UK Budget Deficit Narrows Slightly Thanks to Taxes

The pound responded with a modest increase to news that the UK's budget deficit narrowed in July more than expected, as self-assessed income tax payments boosted Treasury coffers, bringing temporary relief to Chancellor of the Exchequer Rachel Reeves.

According to the Office for National Statistics, spending exceeded revenue by only 1.1 billion pounds compared with 3.4 billion pounds a year earlier. This was the first annual decline in borrowing since November and the lowest July borrowing in three years. The Office for Budget Responsibility had forecast a deficit of 2.1 billion pounds.

The reduction in the deficit reflects an improvement in the state's finances, driven by rising tax revenues and reduced government spending. However, it is important to consider the context in which these changes are occurring. For example, the increase in tax revenues may be linked to inflation, while spending cuts may be the result of austerity measures, which could negatively affect social programs and economic growth. Nevertheless, lower borrowing in July is a positive signal that may support investor confidence in the British economy. It also gives the government greater flexibility in implementing its economic policy.

Still, it should be remembered that July's data represent only one month, and further data are needed to assess whether this trend is sustainable. The budget boost will be a welcome relief for Reeves, who faces a series of difficult decisions regarding the autumn budget. The previous months had been disappointing, but the July improvement helped improve the situation.

For the first four months of the year, the deficit is almost in line with the target — 60 billion pounds compared with the OBR's March forecast of 59.9 billion pounds. Following the data release, markets remained largely unchanged.

As economists note, July is one of the strongest months for the UK's public finances, as individuals and companies make their second self-assessed income tax payment for the financial year just ended.

As for the current technical picture in GBP/USD, buyers need to break through the nearest resistance at 1.3480. Only then will a move toward 1.3530 be possible, though breaking higher above that level will be quite difficult. The ultimate upward target lies around 1.3560. In case of a decline, the bears will attempt to regain control at 1.3440. If they succeed, a breakout of the range would deal a serious blow to the bulls' positions and push GBP/USD down to 1.3410, with prospects of reaching 1.3375.

As for the current technical picture in EUR/USD, buyers now need to push through 1.1660. Only this will allow for a test of 1.1700. From there, the pair could climb toward 1.1730, but doing so without support from major players will be rather difficult. The ultimate target stands at the 1.1768 high. In case of a decline, I expect notable buyer activity around 1.1625. If no support emerges there, it may be best to wait for a retest of the 1.1600 low or consider long positions from 1.1565.