GBP/USD Falls Ahead of UK Budget Hit
The worst risk from the announcement of the UK government budget usually has a negative impact on the Pounds. However, analysts are actually optimistic about GBP/USD. Why is that?
The Pound Sterling has continued to be under pressure for the past two months due to increasing market concerns regarding the direction of the UK government's fiscal policy. In today's trading (November 24), the GBP/USD pair remains capped below the 1.3100 level. Meanwhile, EUR/GBP briefly broke a new record above 0.8860 last week. This uncertainty is expected to ease only after UK Chancellor of the Exchequer, Rachel Reeves, presents the Autumn Budget tomorrow.
Movements in various currency pairs related to Sterling have also tended to be calm in recent sessions. Market participants seem to prefer waiting for certainty before taking new positions. On the other hand, some analysts are beginning to gauge the potential reaction of Sterling after the budget details are published.
The biggest threat to the Pound arises if Reeves fails to present a convincing budget plan for investors. In that scenario, the government might attempt to increase tax revenues with a less effective approach, or add to the debt burden without considering the need for fiscal consolidation.
Historically, such uncertainty often triggers a spike in UK government bond yields and puts pressure on the Pound's exchange rate. However, some analysts believe that the impact this time may not be as severe as usual because the market has already discounted that risk through Sterling sell-offs in recent times. In fact, if the budget presented by Reeves does not deviate significantly from expectations, the Pound has a chance to bounce back.
Moreover, if the budget plan turns out to be more solid than anticipated, Sterling could receive an additional boost. The challenge is that the Pound's exchange rate is currently in a relatively low area. In other words, the room for recovery is quite open as long as the announced budget does not disappoint.
According to the UBS Chief Investment Office, the current movement of the Pound has already factored in fiscal risks over the past month and the USD rally. So even though the Autumn Budget presents two-way risks, GBP/USD could still rise to 1.34 by the end of the year.
The UK government's top priority now is to ensure fiscal health as best as possible. Experts are optimistic about this, so fiscal risks should no longer be a concern for GBP.