GBP flows: GBP stabilises despite gilt sell off
GBP steadies despite sharp gilt sell off on report that Chancellor Reeves has abandned plans for an income tax increase
UK gilts have sold off at the open in response to the FT story indicating that Chancellor Reeves has abandoned plans for an income tax hike in her November 26 Budget. 10 year yields are up 7 bps and 30 year yields up 10bps, but the initial reaction from GBP has been positive, with EUR/GBP retreating from opening levels above 0.8860. Nevertheless, GBP looks likely to remain under pressure, with echoes of the 2022 Budget from the short lived Liz Truss/Kwasi Kwarteng government which triggered a sharp decline in GBP at the same time as we saw a sharp rise in gilt yields. It is likely that Reeves will address the UK’s fiscal problems with other measures, unlike the Truss/Kwarteng approach which relied on improving growth, but the markets will be less happy with what is likely to be a more haphazard approach, and a rate cut in December remains likely in response to any fiscal tightening, so we would expect GBP to remain on the back foot in the run up to November 26. But some of the bad news is in the market, so EUR/GBP gains beyond 0.8850 are still likely to be slow.
