The Pound is poised ahead of today’s pivotal Autum Budget.
Uncertainty surrounding the announcement is very high. Chancellor Reeves needs to convince markets that she has both a credible plan to revive growth while also a long-term plan to stabilise the public finances. Any feelings that their strategy lacks a path back to stability, or if what announced looks to damage growth, then we might see markets quickly react to this. For example, any sizable spending hikes (e.g. large increases to welfare) combined with increases to borrowing would be a red flag to markets and, consequently, sterling and gilts (government bonds) would likely be heavily sold off.
Furthermore, the Budget is also likely to have an impact on the BoE interest rate expectations. Any signs it will hamper UK growth will raise expectations for more aggressive rates cuts from the BoE in a bid to try and get ahead of any future downturns in the economy. More aggressive rates cut (dovish stance) is a negative for the Pound.
So far, Sterling has traded in a reasonably tight range against the USD ahead of today’s Budget. This may signal that investors are reluctant to commit to any sizable positions before Reeves speaks later today (12.30ish). Options markets tell an interesting story, however, with the Financial Times yesterday reporting that GBP put options were dwarfing call options by a ratio of four to one, suggesting that traders see a greater chance of sterling downside than upside post-announcement. Watch this space.
In other news, the USD was on the back foot yesterday following the release of some weaker than expected US economic figures (retail sales, consumer confidence, and producer price growth), which has raised the chances of another Fed interest cut in December. Futures are now pricing in around an 80% chance of a cut versus around a 30% chance only a matter of a few days ago).
