Pound to 'struggle' if reeves can't convince markets on budget

Matthew Ryan, CFA Ebury

We saw a fairly dismal set of UK economic data releases leading into this week's critical budget release. Last week’s CPI report provided news of a welcome easing in price pressures, although the main measure of inflation remained closer to 4% than 3%. Retail sales for October also disappointed, and the PMIs of business activity stalled in November as sentiment in the services sector plunged, partly amid budget uncertainty. All eyes now turn to Wednesday’s budget announcement itself.

It's unclear if there will be enough room to raise taxes sufficiently to reach the required £25-30 billion shortfall, with the government reportedly ruling out hiking income tax rates and seemingly unable to cut fiscal expenditure.

We instead see a sort of patchwork of assorted and targeted tax increases, but the devil will be in the details, and if Reeves is unable to convince markets that she has a credible long-term plan for fiscal sustainability, then the pound could struggle on Wednesday. At any rate, brace for volatility in sterling this week.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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