Labour’s recent tax-and-spend budget has had significant implications for UK asset markets, with some analysts likening it to an ‘old Labour’ policy. ING’s FX analyst Chris Turner points out that the budget is still reverberating across the market, impacting the Pound Sterling (GBP) and Gilt supply levels.
The GBP saw a brief lift following the release of the budget, as some believed it to be stimulative and expected a repricing of the Bank of England easing cycle. However, Turner notes that the BoE is unlikely to be swayed by the government’s budget plans, and there is a risk of short-dated sterling interest rates reversing their spike. Additionally, Labour’s borrowing plans are pushing new Gilt supply dangerously close to £300bn for FY24/25 and FY25/26.
Despite short-dated rate spreads suggesting that EUR/GBP should be trading lower, the pound is holding steady due to a modest fiscal risk premium being priced in. Turner suggests that if eurozone CPI data surprises on the upside, EUR/GBP could move closer to 0.8400. Looking ahead, Turner is slightly bullish on EUR/GBP in the medium term, as the market is under-pricing the forthcoming BoE easing cycle and the UK budget may further contribute to this trend by adding a fiscal risk premium to the pound.
In conclusion, Labour’s tax-and-spend budget has had a noticeable impact on UK asset markets, particularly on the Pound Sterling and Gilt supply levels. While the budget was initially viewed as stimulative, the Bank of England is unlikely to change its easing cycle based on government plans. As Labour’s borrowing plans push new Gilt supply closer to £300bn, there is a risk of short-dated sterling interest rates reversing their spike. Despite short-dated rate spreads indicating that EUR/GBP should be trading lower, a modest fiscal risk premium is supporting the pound. Looking ahead, EUR/GBP may move higher in the medium term as the market under-prices the BoE easing cycle and factors in the potential impact of the UK budget on the pound.
