The pound is on course for its worst performance against the dollar since July and is languishing at 2½-year lows against the euro, reflecting growing investor concern over the outlook for UK government finances.
Sterling, down 2.3 percent in October, is on track for its biggest monthly decline since July and the second-largest drop this year. On Friday, it fell a further 0.11 percent to $1.3136, near its lowest level since April.
British Finance Minister Rachel Reeves, who has faced political pressure this week over a rental dispute, is due to present her budget in late November. Reeves has very limited fiscal headroom, according to her own rules, for manoeuvring to keep Britain’s finances on track.
Expectations are mounting that she may be forced to break election pledges and raise certain taxes after warnings that official forecasts could reveal the economy is weaker than previously thought.
UK government bonds, or gilts, which continue to offer higher yields than those of any other major economy, have rallied strongly this month. Investors are betting that the Bank of England (BoE) may cut interest rates sooner than expected as inflation metrics remain steady.
Money markets currently indicate around a 45 percent probability of a 25-basis-point rate cut at next week’s BoE meeting, compared with almost no chance just a few weeks ago.
IG strategist Chris Beauchamp noted that market pricing remains cautious. “This suggests significant upside for the pound if the BoE disappoints dovish expectations, but also room for a sharp move lower if policymakers signal more aggressive easing ahead,” he said.
“Next week’s decision is genuinely uncertain, making it one of the more consequential BoE meetings in recent memory,” Beauchamp added.
Economists at Goldman Sachs have revised their forecast for the BoE this week, now anticipating a rate cut, compared with no change previously. Their rationale partly hinges on Reeves’ upcoming budget, which they expect “will deliver a large, contractionary impulse to the economy.”