As of Friday, the British pound remains poised for its most substantial four-week decline since September 2023, with traders focusing on the rising US dollar amid fluctuating political and economic dynamics. While the pound held relatively steady at $1.2982, the currency has faced ongoing downward pressure, especially after reaching a two-month low on Wednesday. The pound has dropped 0.5% this week alone, translating to a 3% decline over the past month—its largest slump in over a year.
Anticipation Builds for Labour Government’s Budget Announcement
Traders are bracing for further shifts as UK Finance Minister Rachel Reeves is set to unveil the new Labour government’s first budget on October 30. On Thursday, Reeves confirmed a plan to alter the government’s public debt measure, giving the UK scope for increased borrowing to fund investments. This approach reflects her focus on creating more borrowing flexibility while staying within government budget rules.
Reeves’s announcement impacted the UK bond market, pushing 10-year gilt yields (GB10YT=RR) higher on Thursday. However, the announcement provided limited support to the pound, which remained flat on Friday.
Strategists’ View: A “High-Stakes” Budget with Potential Financial Market Repercussions
The financial market is closely monitoring this budget, seeing it as high-stakes with significant implications for the bond and currency markets. XTB Research Director Kathleen Brooks emphasized that Reeves must reassure investors that the new debt rule will foster growth. Should confidence waver, the UK bond market could react unfavorably, potentially affecting the pound.
“The backdrop to this budget is one of a weakening pound and rising bond yields,” Brooks observed, noting the pound’s recent 3% slide and the 30-basis-point climb in 10-year gilt yields, reaching their highest level since early July.
Impact of Gilt Issuance and Market Reactions
Increased borrowing could lead to additional gilt issuance, which has already pressured the bond market. As a result, the spread between UK 10-year gilts and German bunds—often seen as one of the world’s safest investments—has reached its widest point in 14 months at nearly 200 basis points (DE10GB10=RR). ING strategist Francesco Pesole noted that any prolonged gilt underperformance could generate FX volatility, especially if the pound continues to reflect a minimal risk premium, leaving it vulnerable to downside risks.
Economic Weakness Further Dampens Sterling Sentiment
Adding to investor caution, recent surveys revealed weaker-than-expected UK business activity in early October, further weighing on the pound. Against this backdrop, the pound faces ongoing scrutiny as the Bank of England prepares to make its next move amidst shifting domestic policies and economic uncertainty.
