It seemed that everyone had already come to terms with the idea that the UK budget would partly rely on new taxes imposed on the population, when yesterday, UK Chancellor of the Exchequer Rachel Reeves stated that she is considering abandoning plans to raise basic income tax rates and several other levies. This raises questions about how she intends to compensate for the existing budget deficit.

According to media reports, Reeves may decide not to increase either the basic or higher income tax rate after widespread concerns emerged within the party about breaking the Labor Party's campaign promise not to do so.

Reeves' statement, which came unexpectedly, caused a strong reaction among political opponents and economists alike. Many are wondering whether this is an attempt to gain voter support or the result of a deep analysis of the current economic situation. In any case, abandoning the planned tax increases will require alternative solutions to cover budget expenditures.

One possible option is to revise existing spending items. The government may attempt to cut funding for certain public programs or departments, which will undoubtedly provoke dissatisfaction among the affected groups and industries. Another option is to stimulate economic growth through investments in infrastructure and innovation. Increasing employment and entrepreneurial activity could raise tax revenues in the long term. However, each of these paths carries certain risks and political trade-offs.

Reeves is expected to return to considering the introduction of an exit tax for wealthy individuals leaving the UK and may soften her proposal to raise additional funds from people who use limited liability partnerships.

Rumor has it that the Chancellor has effectively prepared two budgets: one that includes more controversial tax increases and another that includes other changes to the tax code along with a number of smaller increases. Reeves previously supported the first option but faced political pressure forcing her to choose the second.

The Financial Times was the first to report that Reeves had scrapped the planned income tax increase. The article stated that instead she might lower the thresholds at which people pay income tax at different rates. The Treasury declined to comment.

It is worth noting that this development occurred only a few days after Prime Minister Keir Starmer's government fell into a new political crisis amid claims that a senior cabinet minister might challenge him for the leadership position.

The pound reacted to all of this with a major spike in volatility, though it has not yet led to any significant changes in the technical picture.

As for the current technical picture of GBP/USD, pound buyers need to take the nearest resistance at 1.3180. Only this will allow them to target 1.3215, above which a breakout will be quite difficult. The most distant target would be the 1.3244 level. If the pair falls, the bears will attempt to take control of 1.3133. If they succeed, a breakout of this range will deal a serious blow to the bulls' positions and push GBP/USD down to the 1.3085 low, with the prospect of reaching 1.3050.

Regarding the current technical picture of EUR/USD, buyers now need to think about how to take the 1.1655 level. Only this will allow them to aim for a test of 1.1680. From there, they could climb to 1.1705, but doing so without support from major players will be quite difficult. The most distant target would be the 1.1731 high. If the instrument declines, I expect significant buying interest only around 1.1630. If no one steps in there, it would be reasonable to wait for an update of the 1.1605 low or to open long positions from 1.1580.