Despite all the doomsaying prior to Budget announcement, the pound has performed quite well since Wednesday and gilt yields have edged lower.

Markets appear to be reassured by the larger-than-expected fiscal headroom (more than double that afforded by the chancellor last year) and the lack of any real surprises in the tax announcements. A larger headroom should reduce the chances that Labour will need to raise taxes again this time next year, which is providing some comfort to markets.

However, notable risks remain. Most of the tax hikes that were unveiled are backloaded (e.g. freeze to income tax thresholds), which means that it will be while before these revenues are actually realised. Furthermore, it’s very difficult to see where the growth comes from in the budget, which is concerning given the OBR’s recent downgrades to both their growth and productivity medium-term forecasts. The additional £26bn annual tax burden (on top of last year’s £40bn) will add further pressure onto struggling households and businesses. Market expectations for a December BoE interest rate cut have now risen to around a 92% chance.

In other news, growing expectations of another Federal Reserve rate cut in December (now priced in around 80%) continues to weigh on the USD. US data has been on the softer side of late and recent reports suggest that Kevin Hassett, a close Trump ally, has emerged as the leading contender to become the next Federal Reserve Chair. He’s considered the most dovish candidate in the field and therefore more likely to push for lower US interest rates. The market reaction off the back of this news story has been relatively contained so far, however, we expect that speculation around the Fed leadership will intensify as the current Chair’s term approaches its end in May.

As a result, the GBP/USD has risen around 1 cent since Wednesday and trades close to a 4-week high. It will be interesting to see how this currency cross moves as the BoE and Fed both now look certain to cut rates at their meetings next month. The GBP/EUR is around 0.75% higher and is trading at a similar 4-week high.

Parliament

Sterling holds firm after Autumn Budget but risks remain

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).

DOwning street

Markets poised ahead of key Autumn Budget 

Sterling has dropped nearly 0.5% today after the latest UK inflation figures came in below expectations.

The data showed the headline CPI rate for September at 3.8% (vs forecasts for 4.0%) and the core rate at 3.5% (vs forecast for 3.7%). Although inflation remains well above the BoE’s 2% target, the downside surprise has increased market expectations for a rate cut in December (now around 70% priced in vs <50% yesterday), which has weighed on the Pound today. The upcoming Autumn Budget (26th Nov) could prove pivotal on this. Should Chancellor Reeves announce tax-heavy, growth-dampening measures, then this could prompt the Bank of England to cut rates pre-emptively to try and get ahead of a weakening economy.

We also had some further bad news on the state of Britain’s public finances yesterday. September’s borrowing figures showed the UK government borrowed £99.8 billion in the first half of the financial year, which, if we exclude the global pandemic, is the highest amount of credit drawn by the government in over three decades. Needless to say, this adds even further pressure on the Chancellor and markets will be hoping that Labour can present a credible plan to bring down Britain’s large-scale reliance on borrowing.

Elsewhere, the dollar has been well supported so far this week amid easing fears over the state of the US credit market. However, concerns surrounding the US-China trade talks and the ongoing federal closure could put a cap on the USD’s advance. President Trump suggested this week that his meeting with President Xi may not go ahead as planned. While this far from rules out the striking of an agreement, it has dampened hopes of a near-term breakthrough. The US government shutdown has continued and scepticism remains over how much longer this may last. Yesterday, the reported frontrunner for the next Fed Chair role, Kevin Hassett, suggested there will be a possible resolution by the end of this week. However, betting markets imply the shutdown could last for another few weeks!

As a result, the GBP/USD rate is trading around 1% down from last week’s high and currently sits at a 1-week low. The GBP/EUR is down 0.5% today and trades around the lowest levels since Friday. Markets will turn their attention to Friday’s US CPI report which is the first major US release in weeks. With data releases being severely limited due to the US shutdown, this report is likely to carry more weight than usual and could reframe expectations for both Fed policy and broader risk sentiment. Friday will also see the latest UK retail sales figures and PMIs from the UK/EU.

INflation 

Pound drops as UK inflation miss revives December rate cut bets

Sterling fell sharply yesterday as investors panicked following a rout in the gilt market.

Gilts are bonds issued by the UK government to raise funds through borrowing. Yesterday, the yield required on 30-year gilts jumped to the highest level since 1997 (5.7%+) and the 10-year gilts traded to the highest levels of 2025 (4.8%).

While rising global yields are part of the broader trend, it's the rapid pace of change in UK yields that has spooked investors, which has led to Pound weakness. The key driver appears to be mounting concerns over the UK’s public finances, given the massive shortfall between government spending and income, which will likely force further tax hikes in autumn. The issue is that the further gilt yields continue to climb, the larger the government borrowing costs would become and therefore the greater the tax hikes would need to be to plug the gap. This type of dangerous cycle risks destabilising the UK economy if it takes grip. All eyes will be on Chancellor Reeves’ next steps and how the market continues to react.

Over the pond, higher Treasury yields have been supportive for the USD so far this week because (unlike in the UK) the moves have been orderly. Additionally, weakness in the Pound and Japanese Yen have increased flows into the USD. Despite news over the weekend that most of Trump’s tariffs have been ruled illegal, the USD remains strong, as investors see little chance that they will be revoked. The main focus this week will be on Friday’s nonfarm payrolls figures, particularly after the disappointing figures last month. Aside from the headline reading, the key thing to look out for will be whether we see any further downward revisions to previous data, as we’ve in each of the last six months.

As a result, the GBP/USD fell close to 2-cents yesterday and hit a 4-week low this morning. The GBP/EUR dropped just under 1-cent yesterday and traded close to a 4-week low.

London

Yesterday's gilt sell-off hits Sterling

Sterling has clawed back a bit of ground following the latest Bank of England interest rate meeting.

As widely expected, they cut rates by 0.25%. However, the voting pattern surprised markets with a more hawkish tilt. While general expectations were for a 7-2 split in favour of a cut, the actual vote ended up coming in much closer with just five members in favour of a cut and four preferring to keep rates on hold. This narrow margin suggests that the BoE appear to be more concerned about persistent inflation than the weakness in the broader economy and UK labour market. They also reiterated that further cuts need to be “gradual and careful”. As a result, the Pound has erased some of its recent losses.

In other news, the USD was heavily sold off after Friday’s poor non-farm payroll figures. Not only does the data suggest that American businesses are holding off on hiring due to tariff-related uncertainty, but that the Fed will probably have no choice but to lower rates as soon as their next policy meeting in mid-September. This is quite a shift in narrative from this time last week where a rosier picture was being painted of the US economy. Upcoming US economic data releases will therefore be closely scrutinised as the market remain sensitive to which direction the Fed are moving.

As a result, the GBP/EUR rate has risen nearly 1-cent today and currently trades at 6-day high. The GBP/USD is up 0.5% today and over 2% higher from the start of the month (currently sitting at 11-day high).

Bank of England

Sterling strengthens after BoE vote to cut (0.25%) by narrow majority

The Euro has weakened as optimism over the US-EU trade deal has quickly faded.

At the start of the week, the US and EU reached a deal that imposes a baseline 15% tariff on most European goods (including autos) entering the US market. Following the announcement of this deal, European assets initially opened higher on Monday as investors breathed a sigh of relief that a deal had been done and that the worst-case scenarios had been avoided (i.e. 30-50% tariffs). However, these gains proved short-lived as the reaction from European leaders and investors has been largely negative as the details were further digested on the deal.

While the 15% tariff is better than the previously threatened 30–50%, it's higher than the 10% target EU negotiators were pushing for and there are concerns the deal is skewed in favour of the US versus Europe which may have negative economic implications for Europe moving forward. Clearly, it seems they felt that accepting the higher baseline level was a better option than the pain of potentially drawn-out negotiations and uncertainty whilst also coping with super high tariff levels. They will hope to eventually bring these tariff levels down over time, but it will likely lead to a reduction in the European GDP in the short to medium term.

In other news, the USD has strengthened against most currencies so far this week, as markets bet that the signing of trade deals will ease the burden on the US economy. Combined with month-end flows, the recent resilience in US economic data and the fact the USD had been heavily sold this year, then it’s no surprise the Dollar has become more attractive to investors. We will shortly see the release of the latest US GDP figures (1.30pm) and then the latest Federal Reserve interest rate meeting tonight. The Fed will likely once again defy pressure from President Trump and keep interest rates on hold for the fifth consecutive meeting. However, Chair Powell will likely keep the door open to a September cut but without fully committing to one either. The most interesting aspect of the meeting will likely be whether there are any dissenters in the committee voting for an immediate cut.

As a result, the GBP/EUR has rebounded around 1.5-cents from Monday morning and now trades at a 2.5-week high. The EUR/USD has slipped 2.5 cents lower and sits around a 5-week low. The GBP/USD dropped nearly 1% this week and traded down to the lowest levels in 10-weeks.

Euro

Euro slips as investors question US trade deal

The pound remains under pressure amid ongoing concerns about the UK economy.

Yesterday’s UK PMI figures – a forward-looking data set – disappointed with the combined numbers barely in growth territory at 51.0 (vs expected 51.9 and previous 52.0). Perhaps the biggest concern in the data was the sharp slowdown in hiring, with firms cutting jobs in response to the rising costs associated with April’s hike to business tax rates and the national minimum wage. Furthermore, UK retail sales figures out this morning have also fallen short of expectations (0.9% in June vs 1.2% estimates), albeit making a large rebound from the previous month’s abysmal numbers (-2.7% for May).

The fragile growth and labour market outlook presents a dilemma for the Bank of England. The big question is whether they will prioritise jobs or inflation. While a 0.25% cut remains extremely likely in August, there’s a reasonable chance that fears over the latter will limit the pace of easing beyond that.

As anticipated, the European Central Bank held interest rates on hold yesterday which is the first pause in over a year. However, President Lagarde delivered a more hawkish tone than expected in the accompanying press conference, highlighting stronger than expected economic performance and inflation progress. Therefore, the ECB is clearly in no rush to lower interest rates again, although it’s likely they’re keeping their options open and await further news on the trade talks and developments in the economy before potentially committing to another cut (i.e. wait-and-see mode).

Across the pond, US economy continues to appear remarkably resilient. Yesterday’s solid PMI figures point to sustained strength and businesses seem unfazed by lingering trade uncertainties. The big news of the week was the signing of a US-Japan trade deal and reports that the US and European Union are apparently close to reaching a framework trade agreement that will see a baseline tariff rate of 15%. By recent logic, the prospect of lower tariffs should be bullish for the greenback, but the USD has found gains hard to come by so far this week which is a bit of a surprise.

As a result, the GBP/EUR is down around 1-cent from this week’s high and hit a 3.5mth low (and close to the lowest since Oct 2023). The GBP/USD is down nearly 1% from yesterday and trades at the lowest levels since Monday. Next week, traders will continue to review the progress on trade negotiations and how the market react to this, along with the latest Federal Reserve interest rate meeting.

Inflation

Sterling struggles amid ongoing UK economic sluggishness

Sterling remains under pressure as UK economic data continues to disappoint.

Friday’s GDP figures showed a 0.1% contraction in May, missing expectations for modest growth (+0.1%) and following April’s 0.3% contraction. This has raised expectations that the Bank of England may be forced to cut rates further and markets are now pricing in around a 90% chance of a cut next month. The data also raises the risk of additional tax hikes in the autumn and keeps upward pressure on government borrowing costs (Gilt yields remaining elevated and cautiously monitored by markets). As a result, the Pound has continued to underperform against most of its major peers in the past week or so.

Traders will be keeping a close eye on the upcoming UK data releases to see if this pattern continues. This week sees the latest UK inflation report (Weds) and then (perhaps even more importantly) the latest UK jobs numbers (Thurs). There are growing signs that employers are reacting badly to the latest round of tax increases and therefore this release will come under even closer scrutiny than usual and should provide a clearer view of the extent of the weakness in UK economy. 

In other news, Trump continues to threaten very high tariffs to start in August. Notably, markets appear to be generally taking these threats in their stride (we’ve been here before I guess) and appear relatively desensitised to events on that side. Only the US Treasury market continues to send ominous signals, where long-term yields are rising in response to the latest budget bill and ballooning deficit forecasts, but even this is so far orderly. 

Overall, the USD has been steadily recovering from its more recent lows as the US data shows resilience and, so far, has (seemingly) not been hit too hard over Trump’s tariffs. Even feedthrough from the tariffs to inflation has been very limited so far, but this likely can’t last forever. Importers will eventually run out of the inventory they accumulated earlier in the year before the tariffs hit and prices should eventually adjust upwards (especially given strong consumer demand). All eyes will be on tomorrow’s US inflation report for clues on whether the Fed are right to keep interest rates on hold or yield to political pressure from Trump to cut rates.

Tuesday’s US inflation data will therefore draw a lot of attention and provide further clues on whether the Fed are right to keep interest rates on hold or whether they should be looking to cut rates as being pushed by President Trump.

As a result, the GBP/USD has lost around 3-cents since the start of July and trades around a 3-week low. The GBP/EUR has continued to slip lower and trades around a 3-mth low. The EUR/USD has steadily ticked lower to a 2.5-week low having lost around 1% this month.

economy

Sterling on the back foot as data disappoints

Sterling has lost some ground this morning following a softer than expected UK labour report.

The unemployment rate rose as anticipated to 4.6% (from 4.5%), which is the highest reading since June 2021. The data also showed that average annual earnings (inc. bonuses) dropped to 5.3% (from 5.6%) versus expectations for a 5.5% rise. Furthermore, the number of people claiming jobless benefits has jumped by 33.1K (vs. an expected 9.5K rise) which is the most since July last year.

This report suggests that the government’s hike to employer National Insurance contributions and the minimum wage (which came into force in April) is causing employers to hold off on hiring and increase layoffs. This rising unemployment and softer wage inflation could likely push the Bank of England to cut interest rates sooner than expected and markets are pricing in two further rate cuts before the end of the year.

As a result, the GBP/EUR rate is down half a cent this morning and trading at a 4-week low. The GBP/USD is down a cent from yesterday’s high and towards the lower end of where it’s traded so far this month.

Next up on the data front we have US inflation data tomorrow afternoon, UK GDP on Thursday, and US consumer sentiment data on Friday. More importantly, headlines surrounding today’s US-China trade talks could dominate the USDs performance depending on the outcome (positive talks would likely support the USD).

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