GBP: Sterling waits for clarity

The Chancellor presents the autumn Budget today (12.30 GMT), with a broad suite of tax increases designed to close a fiscal gap of roughly £30bn. Markets expect a dense mix of threshold freezes, higher property levies and selective charges, including the proposed tourist tax. The risk is that investors see the package as fragmented rather than strategic, which would leave the UK’s fiscal risk premium largely intact. Gilt markets remain uneasy: the 10-year yield sits near 4.5%, the highest in the G7, while the long end still trades close to late-1990s territory. With public debt near 100% of GDP, the UK stands out to global investors.

Sterling’s climb yesterday reflected position reduction rather than renewed confidence. Short positions have been substantial in recent months and traders preferred not to be caught off guard ahead of a potentially formative Budget. Technically, GBP/USD closed above its 21-day moving average for the first time in over a month, hinting at a shift in short term momentum. Whether it holds depends on how convincingly the Chancellor can define a credible fiscal path.

The domestic press highlights the trade offs. The FT notes that workers on around £50k could face a 1.5 percentage point rise in combined income tax and national insurance by the end of the decade. The Times suggests that a two year freeze in income tax thresholds and changes to pension contribution rules will form the core of the adjustment. The concern is whether these measures raise enough revenue to satisfy the fiscal rule without chilling growth or unsettling markets. A serious misstep would weigh on the pound, although a repeat of 2022’s turmoil appears unlikely as expectations are already calibrated for a heavy tax package.

EUR: Euro benefits from dollar softness

The euro outperformed yesterday, gaining roughly 0.4% against the dollar as weaker US data and geopolitical developments offered support. Reports of progress towards a potential Ukraine–Russia ceasefire helped ease recent risk aversion. Washington has revised its initial peace proposal following talks with Kyiv in Geneva, although Moscow has yet to accept the new terms. Diplomatic activity will continue next week when Steve Witkoff travels to Moscow, while President Zelenskyy has said he is willing to meet President Trump to resolve remaining issues.

EUR/USD has rebounded from oversold levels near 1.15 and now looks set to probe 1.16, with 1.1650 still acting as a meaningful technical barrier. Fresh US data, delayed by the recent shutdown, could provide the trigger for a sustained break.

USD: Weak data weighs on the dollar

The dollar struggled as investors reacted to softer retail sales and weaker consumer confidence. Headline retail sales rose 0.2% versus expectations of 0.4%, while the control group contracted slightly. The Conference Board’s sentiment measure fell to its lowest since April, reflecting concerns over the labour market and persistent price pressures. Some of the gloom may be related to survey timing during the government shutdown, which likely influenced responses.

Political considerations added further pressure. Reports suggest Kevin Hassett is the leading candidate to chair the Federal Reserve. His alignment with a more accommodative stance reinforced expectations of early rate cuts. With rate markets now pricing a very high chance of an initial cut, the dollar has lost some of its previous safe haven support. With only jobless claims on the calendar before tonight’s Beige Book, the path of least resistance still points lower for the DXY.

Looking ahead

If the Budget reduces uncertainty and gives investors a clearer line of sight on the UK’s fiscal approach, some of the embedded risk premium in sterling could fade. In that scenario, GBP/EUR could revisit the 1.1450 area and GBP/USD could look more secure above 1.32. Our view remains that any sterling strength is likely to be tactical rather than structural. Softer inflation would be helpful for households but would also increase the likelihood of faster Bank of England rate cuts, which in turn would place downward pressure on gilt yields and the currency.