GBP does not have to rally a lot more on a credible budget – ING
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Today’s FX highlight will be the UK’s Autumn Statement. Given that the UK’s bond market has largely regained its composure from the sell-off in September, analysts at ING struggle to see what upside there is for Sterling today. Positioning could be the wild card, however.
“Investor views of UK fiscal credibility have largely returned to pre-Truss levels, where the 10-year German Bund-Gilt spread is now 115 bps (versus 228 bps in September) and the UK’s 5-year sovereign CDS has narrowed to 27 bps from 52 bps. Arguably then, the positive re-assessment of the UK fiscal position has largely taken place and suggests that GBP does not have to rally a lot more on a credible budget.”
“A credible budget will deliver substantial fiscal tightening and cement views of a multi-quarter UK recession and one in which the Bank of England will continue to hike rates into 2023. As a pro-cyclical currency, this cannot be a good environment for Sterling.”
“We expect GBPUSD to be unable to hold any gains above 1.20 and prefer sub 1.15 levels before year-end. Equally, EURGBP should find support near 0.86/87.”
“The only thing going for Sterling is buy-side positioning. It is hard to see what Sterling positives the market could take from today’s budget – but there is an outside risk that investors have some residual Sterling shorts to cover. Near-term outside risk is a very painful Sterling short-squeeze taking GBPUSD to 1.23. However, that squeeze should not last long.”
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