Sterling in Suspense: Markets Brace for a High-Stakes U.K. Budget
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A Report by CYS Global Remit Counterparty Sales & Alliance Unit
GBP/SGD | 1.7050 – 1.7150 |
A Currency Held in Stasis Amid Fiscal Anxiety
The British pound is trading in an unusually compressed range as markets count down to the U.K.’s November 26 Budget, a fiscal event that has taken on outsized significance following the turmoil of 2022. While sterling remains under pressure, analysts from Bank of America (BofA) and ING note that the currency has also displayed a surprising degree of resilience, holding its ground despite volatile political headlines, shifting economic data, and mixed signals from the Bank of England (BoE).
BofA characterizes the current period as unprecedented, describing sterling as being “effectively tied to a string” since early September. Unlike typical market conditions—where currencies respond dynamically to macroeconomic releases, risk appetite swings, and monetary-policy developments—the pound has become uniquely fixated on a single future event. In BofA’s words, they “cannot recall similar occasions” in which a major currency ignored its usual drivers so completely. The result is a rare form of market paralysis: neither bullish nor decisively bearish, simply waiting.
This fixation traces back to the shock of September 2022, when the government’s unfunded fiscal agenda triggered a dramatic collapse in gilt markets and a steep drop in sterling. The episode rewired investor psychology. What were once relatively low-impact fiscal updates are now viewed through the lens of potential systemic risk. The increased media scrutiny, rapid-fire political briefings, and constant narrative shifts ahead of the upcoming Budget have amplified that sensitivity, keeping sterling tense and investors risk averse.
Yet BofA sees a “crumb of comfort” amid the noise: the power of Budget-related headlines to move sterling appears to be waning. Earlier this month, the government abandoned planned income-tax hikes—an event that initially signalled fiscal instability. But instead of triggering a selloff, the pound ended the week higher, and GBP risk premiums declined. This diminishing responsiveness suggests traders may be experiencing narrative fatigue, discounting each incremental twist unless it clearly alters the fiscal outlook.
Despite this cooling of headline sensitivity, options markets paint a clear picture: positioning is broadly negative. Volatility-adjusted skew in EUR/GBP is hovering near levels last seen during the 2022 dislocation, indicating that investors are heavily hedged against sterling weakness. But here too lies a paradox that analysts highlight, despite the market being structurally short GBP, the pound has not meaningfully broken lower. Nor has it reacted sharply to dovish BoE communications or softer labour-market data. This combination—bearish positioning but stable spot pricing—suggests underlying demand quietly supporting sterling even as nerves remain elevated.
ING agrees that the pound is trading with a measurable risk premium, one that is unlikely to unwind before the Budget. The bank warns that the recent U-turn on income tax hikes has unnerved gilt investors, reinforcing the link between fiscal credibility and currency valuation. With bond markets still on edge, sterling’s cautious tone is unlikely to shift until the government delivers a clear, disciplined fiscal narrative.
Monetary Policy Crosswinds and the Post-Budget Currency Outlook
Although fiscal uncertainty dominates the current market environment, monetary policy dynamics add another layer of complexity. This week, speeches from two high-profile BoE Monetary Policy Committee (MPC) members—hawkish Catherine Mann and dovish Swati Dhingra—are expected to offer further clues ahead of the December rate decision. Their comments carry weight because the committee is deeply split, and the upcoming vote remains, as BoE Chief Economist Huw Pill put it, “finely balanced.”
Recent inflation data only complicates the picture. Wednesday’s CPI report delivered mixed signals: food inflation moved higher, providing ammunition for hawks wary of lingering price pressures, while services inflation continued its multi-month moderation, bolstering the dovish argument that the economy is cooling sufficiently. For a rate cut to materialize in December, the dovish camp needs one additional MPC member to shift stance—an outcome ING believes is possible if the Budget proves sufficiently restrictive.
This interaction between fiscal and monetary policy will be crucial for sterling’s path once the Budget is released. ING maintains a year-end EUR/GBP target of 0.88, indicating its expectation for only limited sterling recovery. The bank argues that even if the fiscal risk premium declines after November 26, part of that relief may be offset by renewed dovish repricing in interest-rate markets. In other words, investors may soon pivot from worrying about fiscal credibility to anticipating earlier-than-expected monetary easing.
Bank of America holds a more optimistic view. The bank sees the Budget as a “release valve” that could normalize volatility, reduce skew, and restore sterling’s responsiveness to traditional macro drivers. A constructive outcome—built on adherence to the government’s Fiscal Rule and expanded fiscal headroom—could help sterling regain momentum heading into year-end. In BofA’s assessment, the recalibration of rates is mostly complete, and the volatility premium that has weighed on the pound should fade as soon as political uncertainty lifts.
Both banks agree on the central risk: any sign of fiscal slippage—poorly defined spending commitments, inconsistent policy messaging, or insufficient headroom—could quickly reignite market stress. Conversely, a disciplined, credible Budget that balances consolidation with economic support may offer the pound a clearer runway into the final weeks of the year.
For now, sterling remains in suspended animation—steady, tense, and directionless. Once the Budget lands, the currency will finally confront the question it has avoided for three months: has the market been bracing for a threat that never materializes, or merely waiting for the confirmation of risks long anticipated?
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