UK Budget Anticipated to Limit Gains for Sterling Amid Fiscal Changes

The UK Budget is expected to have limited positive impact on the British Pound (GBP) due to anticipated increases in fiscal spending and taxes. According to Kit Juckes, an FX analyst at Société Générale, the current market has largely priced in the effects of the budget, which may result in a short-term bounce for GBP but overall shifts the fiscal and monetary balance in a direction that is negative for the currency.

As the UK prepares for Chancellor Rachel Reeves to deliver the Autumn Budget, scheduled for 12:30 GMT on March 15, 2024, analysts note that much of the budget’s implications are already reflected in market prices. Juckes highlights that the fundamental challenge for the foreign exchange market lies in the relationship between fiscal and monetary policies. Following the so-called “Truss Affair,” the UK’s fiscal watchdog, the Office for Budget Responsibility (OBR), has gained substantial influence over fiscal decisions, as the current government lacks established credibility with the markets.

Given this backdrop, Chancellor Reeves faces a complex task of fulfilling election commitments while navigating internal pressures from various factions within the Labour Party. The budget is expected to reflect increased fiscal expenditure and taxation, creating a scenario that could facilitate easier monetary policies in the future. Juckes warns that this shift is likely to be detrimental for the GBP, as it diminishes the currency’s strength in the longer term.

In the short term, there may be a temporary increase in GBP value if the budget is perceived favorably by investors. Juckes remarks that unless the budget provokes concern among the “Bond Vigilantes,” there is potential for a brief positive reaction in the currency markets. Nevertheless, any gains are likely to be short-lived, as UK interest rates are positioned to decline more than those in the Eurozone.

Current market expectations indicate approximately 10 basis points of easing from the European Central Bank (ECB) by mid-2024 and 60 basis points from the Federal Reserve, along with 50 basis points from the Bank of England (BOE). Juckes notes that anticipated interest rate cuts by both the Fed and the BOE in December could further bolster the Euro against both GBP and USD if they lead to a reassessment of easing measures expected in 2026.

As investors await the budget’s release, market movements suggest a cautious optimism. The GBP has shown resilience, trading around 1.3190 against the USD during the Asian hours leading up to the budget announcement. Meanwhile, GBP/JPY is hovering above 206.00, reflecting a modest increase after minor losses in previous sessions.

Overall, while the market braces for the implications of the UK Budget, the interplay between fiscal policies and monetary strategies will play a crucial role in determining the future trajectory of the British Pound.