British Pound weakens as UK budget announcement nears

Ahead of the UK Autumn Forecast Statement, the British Pound faces selling pressure.
The scale and credibility of the UK’s fiscal headroom will be central to investors’ assessment.
1.25% is the interest rate the BoJ is expected to maintain on Friday.

The British Pound (GBP) has fallen 0.17% against the Japanese Yen (JPY). The cross trades around 209.70 in Wednesday’s European session, weighed down by sterling weakness ahead of the United Kingdom (UK) Autumn Forecast Statement.

Pound Sterling Performance Today

Against the major currencies listed below, the British Pound (GBP) recorded its weakest performance versus the Australian Dollar today. The table presents sterling’s percentage changes against each currency.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.01%	0.22%	-0.05%	0.03%	-0.03%	1.41%	0.18%
EUR	-0.01%		0.21%	-0.05%	0.05%	-0.05%	1.39%	0.17%
GBP	-0.22%	-0.21%		-0.23%	-0.16%	-0.25%	1.18%	-0.05%
JPY	0.05%	0.05%	0.23%		0.07%	0.00%	1.44%	0.21%
CAD	-0.03%	-0.05%	0.16%	-0.07%		-0.06%	1.37%	0.15%
AUD	0.03%	0.05%	0.25%	-0.01%	0.06%		1.45%	0.21%
NZD	-1.41%	-1.39%	-1.18%	-1.44%	-1.37%	-1.45%		-1.20%
CHF	-0.18%	-0.17%	0.05%	-0.21%	-0.15%	-0.21%	1.20%

To read the heat map of percentage changes between major currencies, select the base currency in the left-hand column and the quote currency in the top row. For instance, following the British Pound row across to the US Dollar column gives the percentage change for GBP (base)/USD (quote).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

£18-24bn headroom in focus as cautious UK budget expected to shape gilt response

Major surprises are unlikely in newly appointed Chancellor of the Exchequer John Healey’s first Budget on Wednesday, according to economists at ABN AMRO. Their assessment is that “rising debt-servicing costs, with Gilt yields near multi-decade highs, are eroding the Chancellor’s fiscal headroom… but the UK’s high inflation means wage growth is likely to be a crucial offset, making room for a potential positive surprise.” They therefore expect Healey “to prioritise rebuilding fiscal headroom, while balancing targeted tax rises with limited cost-of-living support.”

For ABN AMRO, the central issue is that “markets will be most focused on the size and credibility of the headroom that remains after the Chancellor’s budget decisions have been accounted for.” With “sensitivity in bond markets” currently elevated, their central expectation is for Healey to “err on the upper end of credible headroom estimates of around £18-24bn, i.e. something not too far from Rachel Reeves’ last budget.” In their view, “the lower bound of a satisfactory figure for markets is probably around the £14-15bn mark.” They warn that “below £14bn, the Chancellor risks a negative bond market reaction,” but suggest that “anything close to or above Reeves’ £24bn is likely to result in a positive market reaction.” Although “much of the rise in gilt yields reflects the global repricing of interest rates,” they warn that “insufficient headroom could add a UK-specific fiscal risk premium on top of this.”

Reviewing the recent fiscal path, ABN AMRO observe that “headroom has been perilously low in recent years as the UK came under increasing fiscal pressure, though Healey’s predecessor Rachel Reeves worked hard to rebuild it.” As they recall, “up until recently, headroom was forecast to decline sharply on the back of the jump in interest rates we have seen this year, from £24bn to around £13bn.” Nevertheless, they “see room for a positive surprise, and this is linked to the Office for Budget Responsibility’s (OBR) wage growth assumption.” This underpins their view that Healey will seek headroom “on the upper end of credible headroom estimates of around £18-24bn.”

Despite surrendering their earlier gains ahead of the UK budget announcement, 10-year UK Gilt yields remain 0.18% higher at close to 5.35%.

Next week’s monetary policy announcement from the Bank of England (BoE) will be sterling’s next major catalyst. Expectations strongly favour a 25 basis points (bps) interest rate increase to 4%.

As investors await Friday’s Bank of Japan (BoJ) monetary policy decision, the Japanese Yen is outperforming its major currency counterparts.

1.25% BoJ hold expected; December hike pricing supports Yen

A pause remains the broad expectation for the BoJ, according to analysts at Brown Brothers Harriman (BBH), who say it is "widely expected to keep rates on hold at 1.25% and assess September’s 25bps hike before tightening again." To illustrate Governor Kazuo Ueda’s cautious approach, they recall that "in September, BoJ Governor Kazuo Ueda warned that rapid rate hikes could unsettle asset prices, adding that it could take some time to confirm that 2% inflation is entrenched." Market expectations have nonetheless shifted in a more hawkish direction, BBH observe, with "the swaps curve price in 75% odds of a 25bps BoJ rate hike to 1.50% at the December 18 meeting and nearly 75bps of tightening in the next twelve months," a repricing they regard as supportive of the Yen.