Sterling experienced a significant drop overnight following the announcement of Chancellor Rachel Reeves’ new budget. The currency’s decline was accompanied by a decrease in 10-year government bond prices and the FTSE. Critics of the budget have raised concerns about the heavy focus on spending, tax increases, and borrowing, while lacking measures to stimulate economic growth. The market uncertainty surrounding the budget has led to doubts about the Bank of England’s ability to implement a substantial rate-cutting cycle.
The Office for Budget Responsibility has adjusted its economic forecast, predicting a GDP growth of 2.0% in 2025, only slightly higher than the previous estimate of 1.9%. In addition, the OBR has raised its inflation forecast for next year to an average of 2.6%, a significant increase from the previous projection of 1.5%.
Despite expectations of a 25 basis points rate cut by the Bank of England next week, bringing the rate to 4.75%, the budget’s emphasis on spending and borrowing may restrict the central bank’s capacity to further reduce rates. Market sentiment now reflects a reduced anticipation of rate cuts, with projections suggesting that the BoE’s base rate will only decrease to around 4% by the end of 2025, higher than previously anticipated.
While a slower pace of monetary policy easing could potentially benefit the Pound, traders are growing increasingly concerned about the UK’s economic growth prospects under the new fiscal approach.
From a technical perspective, the EUR/GBP pair’s breach of the 0.8433 resistance level is seen as confirmation of a short-term bottom at 0.8294, supported by a bullish convergence condition in the D MACD indicator. A more robust rally is expected to target the 55-week EMA at 0.8502, with a decisive breakthrough indicating a potential medium-term bullish trend reversal towards the 0.8624 resistance level.
In light of these developments, investors and market participants will be closely monitoring the ongoing impact of the budget on the Sterling’s performance, as well as its implications for the broader economic landscape in the UK.
