Sterling Bounce Possible But Not Sustainable
Foreign exchange analysts at Société Générale argue that much of the impact of the new UK Budget has already been priced into markets. Increased government spending and higher taxation are expected to shift the fiscal/monetary policy mix in a Sterling-negative direction, limiting any lasting gains for GBP despite potential short-term relief.
Kit Juckes, senior FX strategist at Société Générale, notes: “Nearly everything that can be said ahead of the UK Budget has already been covered in the press. The fundamental issue for the FX market is the balance between fiscal and monetary policy. The so-called ‘Truss Affair’ has given the UK’s fiscal watchdog, the OBR, considerable influence, since the current Labour government lacks previously earned fiscal credibility with markets.”
According to Juckes, the Chancellor faces multiple challenges: On one hand, she must deliver on election promises and satisfy various factions within the Labour Party. On the other, she must present a Budget tight enough to comply with her self-imposed fiscal rules, restore some headroom for spending, and appease the OBR.
The result is a Budget with increased fiscal spending and higher taxation, which overall opens the door to easier monetary policy and a fiscal/monetary mix that is negative for Sterling.
Juckes emphasizes that these developments are clear enough that much of the Budget’s impact is already reflected in asset prices. Unless the Budget alarms the so-called “Bond Vigilantes,” Sterling may react positively in the short term.
However, any bounce is likely to be temporary, as UK interest rates (currently 4%) have more room to fall compared to Eurozone rates (2%). Markets are currently pricing in around 10bp of ECB easing by mid-next year, 60bp of Fed easing, and 50bp of BOE easing.
If both the United States Federal Reserve and the Bank of England deliver 25bp cuts in December, this could support the Euro against both GBP and USD, especially if markets begin to price in deeper easing into 2026.