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Sterling Weakness Could Deepen as U.K. Budget Risk Builds

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According to CNBC, the British pound has outperformed several peers this year but recent weakness could deepen as markets watch the U.K. government’s fiscal stance and the Bank of England’s policy path. Sterling has gained about 1.6% against the euro year to date, 2.8% against the Swiss franc, 4.9% against the Swedish krona and 1% against the Canadian dollar, while it is roughly flat versus the U.S. dollar and down 1.3% against the Japanese yen. The article said sterling has been supported by a resilient U.K. economy, with gross domestic product rising 0.4% in the second quarter after 0.6% growth in the first quarter. Matthew Ryan of Ebury said a clean transition of power reduced political risk around the pound, while Jane Foley of Rabobank said the currency also benefited from market expectations for a Bank of England response to inflation pressures. The Bank of England has kept its key rate at 3.75% this year, and current market pricing points to low odds of a hike at its September meeting. Foley said dovish guidance on Sept. 17 could further pressure the pound ahead of the first annual budget of Andy Burnham’s administration on Oct. 28. New U.K. Finance Minister John Healey said in a Monday speech that he would stay committed to fiscal discipline, while JPMorgan U.K. economist Allan Monks said the remarks suggested caution on tax and spending changes. Ryan said the budget could include higher ancillary tax rates and more debt issuance to fund spending plans.

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