The beginning of a new week has become a time of positive changes for the British currency. On Monday, the pound carefully looked at the situation, and later showed a confident recovery. However, the victory is still far away, experts warn, although there are prerequisites for further growth of the GBP.

The pound's recovery was facilitated by a turn in the monetary policy of Great Britain. The British currency gained momentum after the revision of plans to reduce taxes. This initiative came from Liz Truss, Prime Minister of Great Britain, and Kwasi Kwarteng, Minister of Finance of the country. Representatives of the monetary authorities announced their refusal to reduce the income tax rate, which had previously caused a negative reaction in the ruling Conservative Party.

Against this background, the yield of British bonds fell sharply, while the sterling was in positive territory. The pound received strong support after the statements of Truss and Kwarteng, soaring by 1.4% and updating the high in the last seven days. The GBP/USD pair was trading in the range of 1.1380-1.1381 on Tuesday morning, October 4, remaining in an upward trend. Note that the British currency began a difficult path to strengthening at the end of last week, when it was able to bounce off the bottom and test all-time lows near 1.0400.

Later, the UK Treasury confirmed the curtailment of the plan, which included the abandonment of the 45% income tax rate. Recall that from Thursday, October 6, it was planned to cancel the maximum rate of 45% on annual incomes over 150,000 pounds.

Against this backdrop, experts recorded a rally in the GBP, which gained momentum at the end of the trading session on Monday. As a result, the pound soared 1.50% against the dollar, while the GBP/USD pair received a bullish momentum after comments from the British authorities. Subsequently, the sterling returned to the levels of the end of September, having almost won back the previous losses. According to currency strategists at ING Bank, in the short and medium term, the GBP/USD pair will remain in a wide range of 1.1200-1.1400.

According to the estimates of the monetary authorities of the UK, the current measures "will calm the market and nullify the upward pressure on interest rates." A bonus to these processes will be the recovery of the pound, which will not interfere with the current strengthening of the dollar.

Recall that last Wednesday, September 28, amid a difficult economic situation, the Bank of England had to launch an emergency government bond purchase program. This measure was required to stabilize the financial market, but provoked the collapse of the pound. According to experts, the return to the purchase of assets on the balance sheet is not a capitulation, but an expedient step. Experts assume that in the coming months the BoE will continue to raise the key rate, thereby increasing the yield of short-term bonds. At the same time, further active buying of 20-30-year-old securities to the central bank's balance sheet is not ruled out.

Such a monetary strategy will boost the appeal and competitiveness of the GBP against the USD, analysts believe. Positive results in this direction have already been recorded in the form of a gradual but steady rise in the pound across the entire spectrum of the market. At the moment, financial markets are restoring confidence in British assets, which has been greatly shaken.

However, there is a drawback: some traders are betting on the pound's decline for the next year. According to Bloomberg, at the beginning of the week there were active buying of put-options and simultaneous sale of call-options. Against this background, the risk premium increased: the risk reversals option strategy, based on the difference in premium between call and put options with the same expiration date, exceeded the highs of 2016 and 2010, reaching 4.5%.

At the moment, experts find it difficult to assess the long-term consequences of the new initiative of the British authorities, which provide for the refusal to reduce the maximum income tax rate from 45% to the current 40%. However, many economists are confident in the correctness of the actions of the British government. Experts consider the measures taken to be quite effective. The current situation creates prerequisites for further growth of the British currency, experts conclude.