British Pound declines as UK budget announcement approaches

Ahead of the UK Autumn Forecast Statement, the British Pound remains under pressure.
The scale and credibility of the UK’s fiscal headroom will be key areas of scrutiny for investors.
Friday’s BoJ decision is expected to leave interest rates unchanged at 1.25%.

A 0.17% decline leaves the British Pound (GBP) trading at around 209.70 against the Japanese Yen (JPY) in Wednesday’s European session. Weakness in sterling ahead of the United Kingdom (UK) Autumn Forecast Statement is weighing on the cross.

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

Pound Sterling Records Its Largest Daily Decline Against the Australian Dollar

Against the major currencies listed below, today’s percentage movements in the British Pound (GBP) show its largest fall was against the Australian Dollar.

	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%

Percentage movements between the major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. Selecting the British Pound on the left and following that row across to the US Dollar, for instance, gives the percentage change for GBP (base)/USD (quote) in the corresponding cell.

Gilts await fiscal headroom figures as UK Budget expected to favour caution

Few major surprises are expected by economists at ABN AMRO when newly appointed Chancellor of the Exchequer John Healey presents his first Budget on Wednesday. In their assessment, “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.”

The key test for investors, ABN AMRO emphasise, 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, the bank’s central expectation is that Healey will “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,” and they warn that “below £14bn, the Chancellor risks a negative bond market reaction,” while “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 add a caveat: “insufficient headroom could add a UK-specific fiscal risk premium on top of this.”

Reviewing the recent path of the public finances, 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.”

Although 10-year UK gilt yields have surrendered their initial gains ahead of the UK Budget announcement, they remain 0.18% higher at close to 5.35%.

After the Budget, attention for the British Pound will turn to next week’s monetary policy announcement from the Bank of England (BoE), the next major catalyst. Expectations are strong that the BoE will raise interest rates by 25 basis points (bps) to 4%.

With Friday’s Bank of Japan (BoJ) monetary policy decision approaching, the Japanese Yen is meanwhile outperforming its major currency counterparts.

Yen draws support from December hike pricing as BoJ expected to hold rates

A pause remains the consensus expectation for the BoJ, according to analysts at Brown Brothers Harriman (BBH), who describe it as "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, citing "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," which they regard as supportive of the Yen.