Markets will 'punish' Reeves if she breaks borrowing rules ahead of 'extraordinarily important' week

The next week or so bodes to be extraordinarily important for sterling, and could have a significant bearing on the trajectory of the UK currency in the next few months. In the lead up to next week’s all-important budget announcement, market participants will have a handful of tier-1 economic data releases to digest.

This morning’s October inflation report suggested that price pressures did indeed peak in September, as the Bank of England had predicted. The main inflation rate fell (as expected) to 3.6% last month, from 3.8%, while the core number also dropped to 3.4%.

This should support bets in favour of a December rate cut, which remains around 80% priced in by swap markets. October retail sales and the November PMIs (both on Friday) are expected to come in consistent with the growth slowdown narrative.

A December cut could be practically baked in even before Chancellor Reeves arrives at the dispatch box.

We cover our full musings ahead of next week’s fiscal event in our Autumn Budget Preview report.

In short, we see almost unprecedented uncertainty heading into next Wednesday. Chancellor Reeves has a mammoth task on her hands as she attempts to convey to markets that she has a credible strategy to both boost growth and plug the hole in the public coffers.

Investors are clamouring for spending cuts, but any savings are likely to be minimal, and markets will punish the government if it breaks its self-imposed borrowing rules. Fresh tax hikes are inevitable, but the devil will be in the details.