Sterling tracks EUR very closely as investors 'keep powder dry' ahead of budget
|Sterling continues to track the euro very closely, with the GBP/EUR pair now trading roughly unchanged in the past couple of months. Investors appear to be keeping their powder dry on the pound as they eagerly await the details of next month’s budget, which could be a true do-or-die moment for UK assets.
Thursday’s monthly GDP data hasn’t moved the needle too much. Britain’s economy posted meagre growth of just 0.1% in August, with output continuing to be hamstrung by the recent tax hikes and rising inflation. This means that it will now be very difficult for the economy to meet the Bank of England’s increasingly optimistic 0.4% third quarter growth estimate, particularly as September activity is likely to have been tethered by Autumn Budget uncertainty.
With downgrades to the OBR’s growth forecasts almost certainty on the way next month, and higher gilt yields limiting the ability to increase borrowing, Chancellor Reeves faces an uphill battle to plug the fiscal gap and reassure markets that she has a credible plan for growth.
We expect to see an amalgam of tax increases (virtually confirmed by the government this week) and a modest increase in borrowing, but investors will be clamouring for commitments to at least mild spending cuts. We see this as a must to avert panic over the hit to public sector growth in 2026.
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