British Pound: Budget risks weigh on Sterling – Rabobank

Rabobank’s Senior FX Strategist Jane Foley highlights that the British Pound (GBP) is vulnerable as global bond market pressure focuses on high-debt countries facing elections or budget talks. With a relatively high share of United Kingdom (UK) gilts held by foreign investors and the October 28 UK budget approaching, Foley expects GBP weakness and a higher EUR/GBP over the coming months.

Foreign ownership heightens UK gilt risk

"According to the OBR, foreign investors hold around 30% of UK gilts. Since 2022, the BoE has been reducing the amount of gilts on its balance sheet. Foreign investors are considered to be more reactionary to a souring of domestic news and therefore enhance the prospect of bond market jitters spilling over to the exchange rate."

"GBP does not have this advantage. The proportion of UK government debt owned by foreign investors is relatively high compared with other G10 countries. This increases the likelihood that any gilt market jitters will also be reflected in a weaker pound."

"We would expect that the October 28 UK budget will remain front of mind for GBP markets in the weeks ahead. As a result, we anticipate some discomfort for the pound."

"Together these factors suggest that GBP may be more sensitive to budget concerns than many of its G10 peers. In view of the proximity of the UK budget next month and the uncertainties connected with it, we expect EUR/GBP to be biased higher, towards 0.87 on a 3-month view."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)