Sterling fell sharply overnight, alongside with 10-year government bond and FTSE, as markets reacted to Chancellor Rachel Reeves’ new budget. Critics argue the budget is being heavy on spending, tax hikes, and borrowing but light on measures to stimulate economic growth. Beside, the higher short-term borrowing plans outlined in the budget are casting doubts on whether BoE can proceed with a robust rate-cutting cycle.
The Office for Budget Responsibility revised its economic outlook, forecasting GDP growth of 2.0% in 2025, only a slight improvement over the previous 1.9% projection. Additionally, the OBR raised its inflation forecast for next year to an average of 2.6%, up sharply from the previous estimate of 1.5%.
Although BoE is still expected to implement a 25 bps rate cut next week, taking the rate to 4.75%, the budget’s spending and borrowing plans may limit the central bank’s ability to lower rates further. Market pricing now reflects fewer anticipated rate cuts, with expectations that the BoE’s base rate will only fall to around 4% by the end of 2025, higher than previously projected.
While a slower pace of monetary policy easing could be supportive of the Pound, traders are increasingly worried about the UK’s growth prospects under the new fiscal strategy.
Technically, EUR/GBP’s break of 0.8433 resistance should confirm short term bottoming at 0.8294, on bullish convergence condition in D MACD. Stronger rally should be seen to 55 W EMA (now at 0.8502) Decisive break there will be the first sign of medium term bullish trend reversal, and target 0.8624 resistance for confirmation.
