British Pound: Why are Budget calm and the BoE outlook lending support? – Commerzbank

Relief over calmer fiscal messaging is shaping market sentiment towards the British Pound (GBP) ahead of its key event, the new United Kingdom (UK) budget under Prime Minister Andy Burnham, according to Commerzbank’s Michael Pfister. Expectations of an imminent Bank of England (BoE) rate hike have strengthened following recent labour market and inflation data, though the move is already largely priced in. The Pound has also drawn support from UK government bonds trading more closely in line with German debt than French debt.

How are rates and bonds supporting the Pound?

"While this is unlikely to result in major progress (Burnham recently announced that significant changes would only occur following a potential re-election), market participants are likely to be relieved that the presentation of the new budget is proceeding relatively calmly."

"Labour market figures for August, published on Tuesday, showed a sharp fall in the unemployment rate (from 4.9% to 4.7%). At the same time, job creation in September was stronger than anticipated: rather than a loss of 8,000 jobs, 13,000 were created."

"Although the Bank of England has long tried to ride out the energy price shock - partly to avoid stifling the real economy too severely - the combination of rising inflation, a slight improvement in the labour market, and fairly strong growth figures this year is likely to lead to a change of heart next week. A first interest rate hike is basically fully priced in, and the market expects a further three rises by the middle of next year. This has supported the pound in recent weeks."

"However, the pound has also recently been helped by the fact that, despite concerns about a European sovereign debt crisis, UK government bonds have been trading more like German ones than French ones. This has not generally been the case in the recent past, when UK government bonds normally suffered some of the heaviest losses. It seems that market participants are also giving the new UK government the benefit of the doubt here, which is consequently benefiting the pound."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Learn more.)