BBH FX analysts report that Pound Sterling (GBP) remains stable in anticipation of the UK Autumn Budget. The budget is expected to be dominated by tax hikes and potentially increased gilt sales, factors that are likely to put GBP under pressure against other major currencies.
Key Factors for Sterling Amidst Fiscal and Economic Drag:
- Fiscal Consolidation: The UK government is anticipated to favor tax increases over spending cuts to address its worsening fiscal position.
- Fiscal Drag & Gilt Sales: The performance of GBP will largely hinge on two main factors:
- The projected fiscal drag for the next year (measured by the change in the cyclically adjusted primary budget).
- The planned volume of new gilt sales.
- Previous Forecasts (Spring Budget): The Spring Budget (March) forecasted a cyclically adjusted primary budget balance of -0.6% of GDP for 2025/26 and 0% for 2026/27, indicating a fiscal drag of -0.6% of GDP next year. Total gilt sales for 2025/26 were projected at £299.2 billion.
- Expected Gilt Increase: Analysts now expect 2025/26 gilt sales to be increased by an additional £6 billion to £15 billion.
BBH’s Bottom Line and Outlook for GBP:
BBH anticipates that GBP will continue to underperform against most major currencies. They attribute this to the combination of contractionary UK fiscal policy and disappointing domestic economic activity. These factors are expected to provide the Bank of England (BoE) with more room to deliver greater monetary easing than currently priced in by the market (which is 62bps over the next twelve months).
