The pound rose 0.2% against the US dollar on Friday, reaching 1.2954 during the US session. Despite the rise, the pound is down 0.4% on the week, heading for its fifth consecutive weekly decline, the longest such decline since late 2018. In relation to the euro, the pound rose to 1.898, but is still heading for its biggest weekly decline against the single currency in more than a year, down 1%.
The currency’s decline reflects markets scaling back bets on interest rate cuts, suggesting the budget is not seen as positive for growth, explained Cincotta of City Index. The Office for Budget Responsibility also revised its growth forecasts modestly for this year and next.
but lowered its forecast for 2026-27.
Investors are currently in one of the largest bullish positions in sterling.
with an estimated value of $6.05 billion, leaving it vulnerable to further declines. Data from the US markets regulator last week suggests the pound is the biggest bet against the dollar among major currencies. Derivatives markets also show traders are more willing to pay more for sterling puts than for longs, something they haven’t seen in 16 months.
Neil Mehta, portfolio manager at BlueBay Asset Management, said he was shorting sterling due to its limited movement so far. UK bonds are expected to remain under pressure, especially with the US presidential election looming next week. Michael Weidner, co-head of global fixed income at Lazard Asset Management, said he expected high volatility in global interest rates markets, which could be reflected in government bonds.
Rabobank, meanwhile, said the market reaction was “overblown”, with the Office for Budget Responsibility forecasting the UK’s deficit.
based on current spending and revenues, to shift to a surplus over the next four years.
Bank of America: Fading tensions in bond markets and pound sterling
Bank of America said that tensions in the bond and sterling markets are expected to ease soon. This forecast comes after a strong sell-off in British bonds and the pound, following the government’s budget announcement.
which showed a significant increase in the country’s debt.
The bank’s foreign exchange analysts point out that the market is facing challenges in determining how to trade the pound, given the rise in yields. Kamal Sharma, foreign exchange strategist, said that the effects of the events of September 2022 are still deep.
and that the market is concerned about the speed of the government bond sell-off.
The budget was not well received in the bond market.
as UK bond yields rose, with the two-year bond yield increasing by 20 basis points.
and the 10-year bond yield by 15 basis points. Analysts warn that this increase may indicate an overestimation of the market’s willingness to absorb more sovereign debt issuance.
However, Sharma stresses that yields in the UK are in line with previous movements in European markets, which have recently declined. “Although fiscal stimulus was higher than expected, we do not see conditions for a strong stimulus for sterling,” he says.
Bank of America is bullish on the outlook for sterling, forecasting EUR/GBP to fall by the end of the year.
while GBP/CHF is higher.
Yields have been rising as the market digests the government’s plans, which will add around £70bn a year to public spending.
partly funded by higher taxes and increased borrowing. The UK’s Office for Budget Responsibility also forecasts average inflation of 2.6% next year, down from a previous forecast of 1.5%.
Traders are expecting less than 90 basis points of interest rate cuts by the end of next year.
with cuts expected at the Bank of England’s meeting next Thursday.
Sterling and UK gilts post-budget analysis
The pound (GBP) has seen a slight uptick, while UK gilts remain under pressure, albeit slightly improved from their previous lows.
according to Shaun Osborne, chief foreign exchange strategist at Scotiabank.
After the slide in the British currency following the budget announcement, the pound is showing signs of stabilization. There is a possibility of a 25bp cut in the Bank of England’s target interest rate on November 7.
although the probability of such a cut has been reduced to just 80%.
Although the pound was under pressure on Thursday, price action suggests that pressure is easing. The significant rise from the pound’s lows has created a bullish “hammer” pattern on the chart.
which has helped to reclaim some of the gains. This supports the general trend of the pound within the daily trading range.
Key support for the pound is now at 1.2840, while resistance levels are at 1.2940/45, with stronger resistance at 1.30.
Elsewhere, Toronto-Dominion Bank’s chief interest rate strategist Pooja Kumra discussed the sell-off in UK bonds as markets price in the new Labor government’s willingness to increase borrowing.
which could exacerbate inflation. Kumra noted on Bloomberg that the Bank of England’s failure to calm the market at its next meeting could lead to further selling.
UK short-term government borrowing costs were on track for their biggest weekly jump in more than a year.
while the pound suffered its longest weekly losing streak in six years.
as the budget raised inflation expectations. Two-year government bond yields also posted their biggest weekly increase since June 2023, rising 26 basis points.
This analysis highlights the challenges facing sterling and UK government bonds in the current economic environment, which warrants continued monitoring of future developments.
