VOT Research Desk
Market Analytics and Considerations
Going into the European session on Thursday, the GBPUSD has managed to reverse its daily losses and is trading flat. Later in the day, British Chancellor Jeremy Hunt will deliver the Autumn Budget to parliament.
The UK’s Autumn Assertion will be today’s key forex event. Analysts find it difficult to see much potential upside for Sterling at the moment given that the UK bond market has fully regained its composure following the sell-off in September. Nevertheless, placement can be the deciding factor.
Near 0.86/87, EURGBP should look for support.
The 10-year German Bund-Gilt spread is currently 115 bps (down from 228 bps in September), while the UK’s 5-year sovereign CDS has shrunk to 27 bps from 52 bps, indicating that investors’ perceptions of the UK’s fiscal credibility have mostly returned to pre-Truss levels. Therefore, it may be argued that the UK’s fiscal situation has improved significantly, indicating that the GBP does not have to increase significantly in response to a plausible budget.
A realistic budget will result in significant fiscal restraint and solidify predictions of a multi-quarter UK recession during which the Bank of England will keep raising interest rates through 2023. As a pro-cyclical currency, Sterling cannot thrive in this environment.
We anticipate that GBPUSD won’t be able to maintain any gains over 1.20 and prefer lower 1.15 ranges before the year is through. A support level for EURGBP should be seen around 0.86/87.
Buy-side positioning is the only thing that Sterling has going for it. It is difficult to predict what Sterling benefits the market might derive from today’s budgeting, but there is a chance that investors still have a few Sterling short positions they need to cover. A extremely painful market correction on Sterling that pushes the GBPUSD to 1.23 is a narrow term external risk. That said, it shouldn’t would last that much.
