Pound hits 16-month high against Euro – Autumn Budget risks to UK assets 'skewed to the downside'

The sterling rally against the common currency continues to hit fresh 16-month highs, with the pound also stabilising against the US dollar.

As in the previous week, this was more about the euro’s troubles than about any good news in Britain. Markets increasingly expect the Bank of England to raise rates at its 5th November meeting and we concur, though we still see this as no more than a one off insurance hike. We will this week hear from MPC members Mann, Greene and Pill - the three members who voted for a hike in September.

Given the renewed focus on fiscal sustainability among bond investors, this month’s Autumn Budget remains a critical risk for both gilts and the pound, and Thursday’s GDP print is unlikely to change that.

With much of the government’s fiscal headroom eroded due to the spike in yields, we see additional tax increases as inevitable even before we get to Burnham’s spending ambitions.

We see the fallout in markets as dependent on whether Healey can keep damage to a minimum, while convincing markets that future spending plans won’t come at the expense of debt sustainability. The room for error is small, however, and risks to UK assets appear skewed to the downside heading into the fiscal event.