London Facing Economic Crisis, Pound Sterling Weakens
Sterling fell 0.9% to $1.3015, after British finance minister Rachel Reeves set out the difficult economic backdrop she was wrestling with, pointing to high debt levels, low productivity and stubborn inflation.
"Reeves’ remarks that her budget choices will focus on reducing inflation to prepare for rate cuts are likely to enliven the debate about a (Bank of England) move before year-end and will focus attention on this week’s BoE meeting," Rabobank head of currency strategy Jane Foley said in a note.
"We would expect the pound to remain on the back foot heading into the November 4 policy meeting given speculation of a dovish tilt.
Sterling came under broad selling pressure after UK Chancellor Rachel Reeves used a rare pre-budget address to prepare the public for “hard choices” ahead of the November 26 fiscal announcement. Reeves emphasized the need to bring public debt under control, refused to rule out tax increases, and outlined plans for business-rate reform aimed at supporting local firms. She framed her upcoming budget as one for “growth with fairness,” stressing that fiscal decisions will be focused on lowering inflation.
Reports also suggest that the government is considering a 20% “settling-up” tax on the assets of people emigrating from the UK, which could raise about £2 billion annually and apply to the sale of assets such as company shares.
Meanwhile, attention now turns to the Bank of England (BoE) interest rate decision on Thursday, where investors largely expect the central bank to hold the Bank Rate at 4.00%. With inflation still hovering around 3.8%, well above the BoE’s 2% target, policymakers are expected to retain a cautious stance.
According to the latest BHH Market View report, the expected fiscal drag should leave room for the BoE to deliver more easing than currently priced in, around 50-basis-points (bps) over the next 12 months, which could further weigh on the Pound. The swaps market currently implies about 30% odds of a 25 bps rate cut to 3.75% at this meeting.
Source: Fxstreet
