Sterling Recovers After Market Shock Over UK Autumn Budget

The British pound (GBPUSD=X) managed to claw back some of its losses on Thursday, trading around $1.2982 in early European hours. This recovery follows a sharp decline against the dollar the day before, triggered by the UK’s newly unveiled autumn budget and robust GDP data from the United States.

The currency rose slightly by 0.1%, but investor sentiment remained cautious in response to the first budget announced under the Labour government. The budget outlines £40 billion in tax hikes aimed at addressing fiscal gaps and enhancing public services.

One of the most notable fiscal adjustments is a hike in national insurance contributions for employers. Philip Shaw, economist at Investec, commented on the budget’s unveiling, stating, “When the figures were fully disclosed, UK markets responded with apprehension. Gilt yields on 10-year bonds surged by as much as 20 basis points, while the pound tumbled.”

The budget’s mixed reception reflects concerns over increased borrowing costs and a potentially slower growth trajectory—factors that typically contribute to a weaker pound and rising bond yields. Historically, higher UK bond yields have provided some support to sterling, but markets remain wary.

Shaw also noted the calculated risks involved in the government’s fiscal strategy, warning, “The budget is a high-stakes move. If it fails to deliver, the UK’s fiscal position could be left in a worse state than before.”

In addition to domestic fiscal challenges, the pound’s recovery is also constrained by the dollar’s strength, bolstered by market caution over the closely contested upcoming US presidential election. Current polling indicates a narrow lead for Harris, at 46% to 43%.

Investors will now turn their focus to Bank of England (BoE) Deputy Governor Sarah Breeden’s keynote speech in Hong Kong. Scheduled to address the “Opportunities and Challenges of Emerging Technologies in the Financial Ecosystem,” Breeden’s remarks are expected to shed light on the BoE’s current stance on the UK economy, which could impact market sentiment further.