Pound scrapes back losses after budget whiplash
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The pound (GBPUSD=X) pared back losses on Thursday, trading around $1.2982 during early European trade. Sterling plunged against the dollar in the previous session, following the release of the UK's autumn budget and the latest GDP figures from the United States.
The pound was up by just 0.1% as the initial reaction to the Labour government's first budget was far from positive. The budget introduces ￡40bn in tax increases aimed at bridging public finance gaps and bolstering public services.
A key aspect of the budget is an increase in national insurance contributions for employers. Philip Shaw, an economist at Investec, said that the unveiling of these fiscal measures led to a nervous response from UK markets.
“When the numbers were seen in plain view, UK markets reacted nervously. Having initially fallen, 10-year gilt yields jumped by as much as 20 basis points at one stage while sterling sold off,” he stated.
Read more: Pound whipsaws after first Labour budget in 15 years
The negative market reaction can also be attributed to a combination of increased borrowing and weakening growth prospects, which typically contribute to a declining pound and rising bond yields. Historically, rising UK bond yields have been seen as supportive of the pound.
However, Shaw cautioned that “the budget is a calculated risk which could backfire, leaving the UK's fiscal position in a worse mess than when it started.”
The pound's struggles are also compounded by a strong dollar, as market remain cautious amid ongoing uncertainties surrounding the upcoming US presidential election. Current polling show a tightly contested race, with Harris leading slightly at 46% to 43%.
Read more: How the UK budget will affect your money in six easy charts
As traders look ahead, attention should turn to a keynote speech by Bank of England (BoE) deputy governor Sarah Breeden in Hong Kong. The conference will focus on the "Opportunities and Challenges of Emerging Technologies in the Financial Ecosystem," and investors hope it will provide insights into the BoE's stance on current economic conditions.
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