Yesterday, the Bank of England (BOE) left interest rates unchanged, but the decision was extremely close, with a vote of 5-4 (it was expected to be 6-3). Four decision-makers voted in favour of a 25-basis-point rate cut, paving the way for such a move in December, Commerzbank's FX analyst Michael Pfister notes.

GBP faces pressure ahead of potential budget tax measures

"In addition to the close vote, there were other indications that further interest rate cuts are likely in the coming months. Whereas in September the inflation risks were explicitly highlighted, the risks to the outlook were described as balanced this time. Inflation forecasts were also revised downwards following the weaker figure in September. Our economists therefore continue to expect another interest rate cut as early as December, and they have also added a further step in April to their annual outlook."

"These developments are already providing some arguments for a weaker pound. However, we currently consider the approaching budget to be the greater risk factor. Recently, reports have emerged that the government is considering increasing the income tax and introducing a penalty tax for wealthy individuals looking to leave the country. While we welcome the government's acknowledgement of the conflict between its election promises of a balanced budget and no increase in its main sources of revenue, there is a risk that the budget will contain difficult decisions that will weigh on the pound."

"We have therefore adjusted our EUR/GBP forecast, expecting a value of 0.88 by the end of December and 0.89 in the first half of next year, by which time the effects of the budget and further monetary policy will be clearer. Currently, however, the risks clearly favour an even weaker pound, even though we continue to believe that the market somewhat underestimates the figures from the real economy."