This week’s Autumn Budget is set to be a major risk event for sterling, as markets attempt to gauge the impact of the fiscal showpiece on the UK economy.
A degree of stability has returned to both sterling and gilt markets of late, but there will be limited tolerance for gimmicks in the budget. The chancellor has a tough task as she tries to convince markets that she has a credible plan to both balance the books in a sustainable manner, while injecting some much needed growth into the UK economy. Reports that the budget shortfall may not be quite as large as previously believed are welcome, but further tax hikes will be needed, with no real consensus view as to what this will entail.
Stock market volatility, nerves over valuations and the crypto crash are having no more than a modest spillover into currency markets. The dollar seems to be reprising its role as a safe haven, and last week it rose against nearly every major peer. The moves weren't large, however, the ranges that have held since June are holding for now. This week is the Thanksgiving holiday in the US, and there will be little data of note, although retail sales data on Tuesday will be watched closely.
GBP
We saw a fairly dismal set of UK economic data releases leading into this week's critical budget release. Last week’s CPI report provided news of a welcome easing in price pressures, although the main measure of inflation remained closer to 4% than 3%. Retail sales for October also disappointed, and the PMIs of business activity stalled in November as sentiment in the services sector plunged, partly amid budget uncertainty.
All eyes now turn to Wednesday’s budget announcement itself. It's unclear if there will be enough room to raise taxes sufficiently to reach the required £25-30 billion shortfall, with the government reportedly ruling out hiking income tax rates and seemingly unable to cut fiscal expenditure. We instead see a sort of patchwork of assorted and targeted tax increases, but the devil will be in the details, and if Reeves is unable to convince markets that she has a credible long-term plan for fiscal sustainability, then the pound could struggle on Wednesday. At any rate, brace for volatility in sterling this week.
EUR
The PMIs of business activity for November contained no surprises. The economy is still growing at a reasonably solid clip, albeit the dichotomy between a stagnant manufacturing sector and a more solid service sector remains. While the latest employment data runs on somewhat of a lag, the Eurozone as a whole continued to generate jobs at least through the third quarter of 2025, even if the rate of jobs growth is coming down. This bodes well for a solid end to the year in the Euro Area economy.
Buoyed by a still healthy labour market, we expect the services sector to continue to support modest growth in the Eurozone and support the euro in the coming months. In the meantime, investors will have a handful of speeches from European Central Bank officials to digest, including from President Lagarde on Thursday. Yet, given the high bar for further rate cuts, we do not foresee any fireworks to come out of these communications.
USD
The delayed September nonfarm payrolls report surprised to the upside, suggesting that as of two months ago the labour market had not yet stalled completely. 119k net jobs were created, although the separate household survey reported a slight increase in the unemployment rate, primarily caused by increased labour force participation. This may be enough to allow the Fed to hold interest rates steady at its December meeting, albeit futures are now just about pricing in a greater chance of a cut than a pause.
The drip of fresh economic news after the government reopening remains a tailwind for the dollar. We think fears about the impact of a stock market downturn on confidence and spending are exaggerated. US stocks are only down to where they were less than six weeks ago and remain up 12% so far on the year. A further move to the downside could change that view, but we think that we would need to see a fairly marked move lower.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- UK Autumn Budget Preview
