Autumn Budget Uncertainty Clouds Sterling's Future
Saturday, October 19, 2024 (Week 42)
The United Kingdom, a G7 nation and parliamentary constitutional monarchy led by Prime Minister Starmer, is navigating a complex global landscape post-Brexit. The most significant upcoming event is the Autumn Budget on October 30th, a potential turning point for both the UK's fiscal health and the pound.
Economic uncertainty surrounding this budget has been the primary driver of GBP’s performance for the past month (September 1st-October 19th). Chancellor Reeves’ talk of "difficult decisions" has amplified market jitters, pushing GBP below $1.31, near one-month lows on October 17th. While bright spots appeared—like September’s 1% jump in retail sales, a two-year high (Office for National Statistics)—the narrative of a slowing UK economy keeps GBP vulnerable. The 10-year gilt yield exceeding 4.2% on October 10th further underscores market anxiety.
Investment Thesis
Upcoming Week (October 19th-25th): Bearish. Volatility will likely persist until the Autumn Budget is revealed. Key data releases, like CPI and labour market reports, will likely be overshadowed by budget speculation.
Upcoming Month (October 19th–November 30th): Neutral. The budget’s market reaction is critical. A positive response could trigger a GBP recovery. A negative response could worsen GBP’s decline. The November BoE meeting will be crucial, as the market assesses the Bank’s response to the budget.
UK Financial Markets: On the Brink of the Autumn Budget
The UK's financial markets—the pound (GBP), FTSE 100, gilt market, and commodity markets—are bracing for the Autumn Budget. This event, scheduled for October 30th, has the potential to significantly influence the financial landscape.
FTSE 100: Navigating Volatility
The FTSE 100 has displayed a mixed performance, marked by volatility during the past six months. The index saw gains, supported by rising gold prices and positive US data, reaching a 6-week high of 8,305 on October 16th. However, weaker earnings and ongoing economic uncertainty, particularly surrounding the Autumn Budget, have caused fluctuating price action. The FTSE's performance has indirectly influenced GBP, offering temporary support during rallies but failing to counteract broader economic anxieties.
Gilt Market: Budget Concerns Drive Yields Higher
UK gilt yields have been rising. The 10-year gilt yield rose above 4.2% on October 10th, nearing three-month highs. This reflects investor unease about the upcoming budget. The gilt market will assess the budget’s implications for government borrowing and its impact on the pound. While higher yields might attract some foreign investment, benefiting GBP, overall economic concerns limit this potential upside.
Commodity Markets: Indirect Influences
Global commodity price movements can indirectly affect GBP. Oil's recent decline, driven by demand worries, weighed on energy-related stocks in the FTSE 100. This has indirectly impacted GBP. Conversely, gold's record highs have supported the mining sector within the FTSE, indirectly benefiting GBP. However, the Autumn Budget remains the primary driver.
UK Economy: At a Crossroads
The UK economy, dominated by services, especially financial services, faces challenges amid slowing growth and persistent inflation. The upcoming Autumn Budget is the most significant near-term event.
GDP: A Slowing Trajectory
UK GDP growth has moderated. Q2 2024 growth was revised down to 0.5% (Office for National Statistics). Zero growth in June and July reinforces concerns about slowing economic activity. The BoE expects 0.3% growth in Q3. Weak GDP data pressures GBP, while a positive surprise could offer support.
Inflation: Below Target, but Uncertainty Remains
UK inflation fell to 1.7% in September, below the BoE’s 2% target, largely due to lower transport costs (Office for National Statistics). However, the BoE forecasts a rise to 2.5% by year-end as base effects dissipate. Sustained lower inflation would boost GBP. Renewed price pressures would raise the spectre of BoE rate hikes and potentially weaken GBP.
Labour Market: Cooling Down
The UK labour market shows signs of easing. Unemployment fell to 4% in August (Office for National Statistics). Wage growth continues to moderate. Average weekly earnings, including bonuses, rose 3.8% year-on-year in August. Cooling wage growth reduces pressure on the BoE to maintain high rates, possibly supporting GBP. However, a resurgence in wage pressures could reinforce a hawkish BoE stance, potentially limiting gains for the pound.
Consumer and Business Sentiment: Budget Jitters Dominate
Consumer confidence is weakening. The GfK consumer confidence index plunged to a six-month low of -20 in September. The CBI Distributive Trades survey also highlighted a cautious outlook amongst retailers. This dampened sentiment is a drag on GBP. The market’s budget reception will greatly affect future sentiment and GBP performance.
Upcoming Economic Events
Key economic data releases this week that could impact GBP:
Tuesday, October 22nd: S&P Global/CIPS Flash UK Composite PMI, S&P Global/CIPS Flash UK Manufacturing PMI, S&P Global/CIPS Flash UK Services PMI
Wednesday, October 23rd: CBI Industrial Trends Orders
UK Monetary Policy: The BoE's Balancing Act
The Bank of England, led by Governor Andrew Bailey, faces a delicate balancing act. The next interest rate decision, scheduled for November 7th, is the most significant upcoming event. The Bank Rate, currently at 5% following a hold in September, reflects the BoE's focus on core inflation. The BoE’s £100 billion gilt reduction plan for the coming year indicates a hawkish quantitative tightening stance. This supports GBP. However, uncertainties regarding the future trajectory of monetary policy cap GBP’s upside potential. A dovish shift could trigger a GBP decline.
BoE: Navigating a Complex Landscape
The BoE is in a holding pattern. While inflation has eased, concerns remain about underlying price pressures, especially in services. The Bank's quantitative tightening policy adds to its hawkish stance. However, a possible shift towards aggressive easing could weaken GBP. Conversely, persistent inflation would reinforce hawkish expectations, potentially supporting GBP. The BoE’s response to the Autumn Budget will be crucial in understanding its future policy direction.
UK Geopolitics: Budget Uncertainty and Global Headwinds
Politics: Autumn Budget Takes Center Stage
The UK political landscape is consumed by the impending Autumn Budget. The market’s response will be a major test for the government, significantly impacting GBP. Concerns about tax hikes and spending cuts cloud the outlook. A fiscally responsible budget could boost GBP, while a negative reception could pressure the currency.
Geopolitics: Global Risks Remain
Global geopolitical uncertainties, including the conflict in Ukraine and Middle East tensions, can indirectly affect GBP by influencing risk sentiment and safe-haven flows. Escalating tensions could increase GBP volatility.
Sovereign Risk: Fiscal Sustainability Under Scrutiny
The UK’s sovereign risk profile is a market theme. The Autumn Budget’s reception will be a critical test. A plan to address public debt and manage spending is essential for maintaining market confidence and supporting GBP. Signs of fiscal weakness would pressure the pound.
GBP Outlook: Awaiting the Budget Verdict
The pound's recent performance reflects market uncertainty. GBP has been under pressure, especially against the USD. While positive surprises could temporarily boost GBP, prevailing economic uncertainty and the BoE's cautious approach are likely to keep substantial gains in check. The budget’s reception will be crucial for GBP's near-term direction.
The UK economy and GBP are at a critical point. The Autumn Budget will be a defining event. Key risks include a negative market reaction to the budget, stubbornly high core inflation, and escalating geopolitical tensions. Positive surprises in UK economic data or a hawkish BoE could, however, support GBP.
Key Takeaways for Forex Traders:
Closely monitor the Autumn Budget. GBP's direction hinges on its market reception.
Focus on the BoE's November 7th meeting. The Bank's assessment of the budget and any policy adjustments will be key.
Expect volatility. Uncertainty surrounding the budget and global risks will likely increase GBP volatility.
Sources:
Bank of England
Confederation of British Industry
GfK Group
BRC - British Retail Consortium
Office for National Statistics
Trading Economics