UK budget unlikely to shock the Pound assuming that fiscal prudence is maintained – Rabobank

Next week brings the UK budget. The budget has the potential to impact the Pound Sterling (GBP) – which is currently the second best performing G10 currency in 2024 after the US Dollar, economists at Rabobank say.

EUR/GBP to edge lower to 0.8500 on a three-month view

The market is likely prepared for a moderate amount of fiscal loosening next week. Press reports suggest that this may include fresh changes to National Insurance, rather than income tax. Even a low level of fiscal stimulus would likely reinforce the consensus view that the BoE would likely be in a rush to cut interest rates. 

Of particular interest to the market could be any supply-side reforms that could increase incentives to work or regulation changes that could enhance incentives to invest. While any increase in the labour pool would be anti-inflationary, such policies would be pro-growth and are thus likely to be seen as GBP-friendly.

Assuming that budgetary prudence is adhered to by Chancellor Hunt and maintained in the pledges of the opposition, we expect EUR/GBP to edge lower to 0.8500 on a three-month view before moving down to 0.8400 on a six-month view.