Sterling begins Tuesday on the defensive after losing ground to the US dollar to start the week. It had reached a 17-month high against the euro on Friday but ceded some of that momentum yesterday, with investors understandably reluctant to carry much risk into the autumn Budget.
Most people are expecting a cautious statement that safeguards the public finances. Government borrowing costs have fallen alongside hopes that the chancellor will follow the fiscal rules, rebuild the Treasury’s spending buffer and limit long-term borrowing. That provides some support for the pound, but it also opens the door for a reversal should we see any nasty surprises tomorrow lunchtime.
Since taking over from Sir Keir Starmer, Andy Burnham has had to balance the challenging fiscal picture against promises to give households and businesses more breathing room. UK inflation rose to 3.5% in September, while expensive energy is expected to keep price pressures elevated. Any measures that imply significantly higher borrowing could therefore unsettle both bond and currency markets.
Of course, the new economic and fiscal forecasts will be every bit as important as the policies themselves. The Office for Budget Responsibility (OBR) will be hoping to avoid a repeat of last year’s botched data release that ended up moving markets before the chancellor had even stood up.
The Federal Reserve is also in the spotlight ahead of its interest rate meeting. A pause is widely expected after September’s rate rise, although markets still see another increase as essentially priced in for December. The European Central Bank is also expected to hold on Thursday as policymakers weigh high inflation against rising borrowing costs and political pressure in France.
Today’s news featurs US durable goods orders, consumer confidence and new-home sales. Those releases may provide some short-term direction, but Wednesday’s Budget and the twin decisions from the Federal Reserve and the European Central Bank look set to be the week’s defining tests.
GBP: Recent strength on pause
The pound has surrendered some of Friday’s gains against the euro and slipped against the US dollar. That smells more like a bit of risk management than a decisive change in sentiment, particularly as UK borrowing costs have continued to ease. Still, sterling will be influenced by the size of the fiscal buffer and whether the announced measures could add to inflation or growth before the Bank of England’s November meeting.
GBP/USD: the past year
EUR: Resilient Germany offers support
Germany’s Ifo Business Climate Index hit its best level since May 2023 this month, belying the recent gloom that has centred on its Western neighbour. There are still tests ahead this week, notably another consumer sentiment survey tomorrow before inflation and GDP releases arrive on Friday.
GBP/EUR: the past year
USD: Fed pause still leaves December open
The US dollar gained against the pound on Monday but was broadly steady against the euro. Lower Treasury yields limited its momentum as traders prepared for the Federal Reserve meeting. The outlook looks good for the dollar though, with some strong data dovetailing nicely with another hike pencilled in before the end of the year.
USD/GBP: the past year
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