Sterling has weakened in anticipation of a restrictive Autumn Budget
For a few months it has felt that pre-Budget nerves were keeping sterling in check, but now the pound is taking a more meaningful leg lower as the event approaches. The good news is that gilt yields have moved lower, reflecting bond markets’ belief that Chancellor Rachel Reeves will not jeopardise the sustainability of the UK’s public finances. However, this is likely to come at an economic cost. It looks increasingly likely that Labour’s 2024 manifesto pledge not to increase the four key taxes - income, corporate, national insurance and VAT - will be broken, and perhaps via an increase in income tax. That would drag on demand and likely reduce inflation pressures, prompting lower interest rates at the Bank of England, and a weaker sterling outlook. While it doesn’t take much to get all doom and gloom about the domestic situation, I do think that the risks to the pound still feel quite asymmetrical, even though GBPEUR already sits at a two-year low.
The dollar is edging higher despite the ongoing government shutdown in the US
At some point you’d imagine there’d be an economic cost to a non-functioning government, not to mention the continued uncertainty. However, the USD has been happy to ignore the shutdown and may soon be able to forget it entirely after positive news on that front over the weekend. Instead the dollar has gained slightly on continued de-escalations in trade spats and a warning from Chair Powell that a third consecutive Federal Reserve rate cut was not a foregone conclusion. There is a diverse range of views at the Federal Reserve over how to proceed. Despite justifying last month’s rate reduction by pointing to increasing risks in the labour market, there is clearly an air of caution on the committee – Powell felt it necessary to push back on aggressive pricing in short-term interest rate markets. The dollar strengthened in response and is now moving to multi-month highs against some of its peers. Banks reducing bets on further USD weakness has been a notable theme of late.
Chart 1: GBPEUR falls to a two-year low
Sources: Macrobond, Bloomberg, Investec.
European currencies still lead the way in the G10
European currencies remain markedly stronger on the year, excluding sterling
Despite the recent dollar strength taking EURUSD briefly below 1.1500, the pair remains more than 10% higher over 2025. Elsewhere in Europe the gains are even greater. The Swedish krona is still more than 15% stronger versus the USD this year, as are the HUF and CZK. Much of those gains can be attributed to the proposed increases in European Union fiscal spending. While that specific growth boost is yet to fully materialise, Eurozone GDP growth exceeded expectations again in Q3 – it’s third outperformance in the last four quarters. With fiscal expansion on the Continent and fiscal tightening in the UK, the growth differentials look unfavourable for the pound versus its European peers. Our economists’ current GBPEUR forecast is 1.1200 at end-2026, but risks are tilted towards the downside, especially if the economic restrictiveness of the Autumn Budget is severe.
Chart 2: Sterling far underperforms its European counterparts
Notes: uses an equal-weighted index for each currency against the other nine in the G10.
Sources: Bloomberg, Macrobond, Investec.
Elsewhere, Japanese yen selling has resumed, prompting verbal intervention from the newly appointed finance minister Satsuki Katayama
So far that has been limited to expressing disapproval of recent “one-sided and rapid moves,” but it certainly looks to be a returning theme. USDJPY has now risen more than 10% from its April low, even as US interest rate cuts resume and amid talk of a possible Bank of Japan interest rate increase. On the other hand, the de-escalation in US-China relations has helped the Australian dollar hold onto its gains, despite the recent USD strength. GBPAUD fell back below 2.0000 for the first time since February, while EURAUD sits near four-month lows. Lastly, a mention for the South African rand – while GBPZAR isn’t typically a technically trading pair, it now sits not too far from 22.5000, which has provided support on multiple occasions in the last three years, and so is one to watch this month.
Forecasts
Sources: Macrobond, Bloomberg, Investec
GBP/USD
Sources: Macrobond, Bloomberg, Investec
GBP/EUR
Sources: Macrobond, Bloomberg, Investec
Notes: Forecasts are produced by Investec Economics and are for end-quarter
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Ria Selvaratnam
Head of Treasury Sales
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