Labour’s large tax-and-spend budget – described by some as an ‘old Labour’ policy – is still reverberating across UK asset markets, ING’s FX analyst Chris Turner notes.
New Gilt supply coming dangerously close to £300bn
“The Pound Sterling (GBP) briefly got a lift yesterday on the view that the budget was stimulative and that the Bank of England easing cycle would need to be repriced higher. We suspect the BoE is unlikely to be swayed by the government’s budget plans and we see the risk that yesterday’s spike in short-dated sterling interest rates gets reversed.”
“At the same time, it looks as though Labour is sailing very close to the wind with its borrowing plans – with new Gilt supply coming dangerously close to £300bn for FY24/25 and FY25/26. EUR/GBP should be trading a little lower based on short-dated rate spreads and the reason it is not is probably because a modest fiscal risk premium is going back into sterling. Should eurozone CPI surprise on the upside today, EUR/GBP could move closer to 0.8400.”
“Over the medium term, we are slightly bullish on EUR/GBP because of the market under-pricing the forthcoming easing BoE cycle. And it now seems the UK budget may add to that trend if indeed a modest fiscal risk premium gets priced into the pound. “
