Reeves may trade carefully in first budget – ING

The highlight of today’s session is the new Labour government’s first budget released at 1330CET. Does sterling rally on pro-growth fiscal loosening and a rise in real yields? Or is sterling flat on a carefully crafted series of tax hikes and spending increases which balance day-to-day spending? Or does Labour over-reach with some spending plans – reflected in higher-than-expected Gilt supply – which re-inserts some fiscal risk premium into the pound, ING’s FX analyst Francesco Pesole asks.

EUR/GBP is currently pressing 0.8300

“Discussing it with team members we think that a flat sterling outcome is a little more likely in that Chancellor Rachel Reeves will tread carefully. The negative risk will probably be judged against the key metric of the UK’s Gilt supply remit for FY24/25 and FY25/26.”

“Current numbers are around £276/277bn. The consensus seems to be that a modest increase to this supply – in the region of £10-20bn per year – would be digestible for the Gilt market. Any number above £300bn is therefore probably a Gilt and sterling negative.”

“EUR/GBP is currently pressing 0.8300, largely because of a dovish re-appraisal of upcoming ECB policy. As above, we do not see a strong reason for EUR/GBP to bounce today. And below, 0.8300, the next immediate target is 0.8250/80.”