The UK Budget is largely priced into markets, with increased fiscal spending and taxes likely to shift the fiscal/monetary mix in a sterling-negative direction, limiting any lasting gains for GBP despite potential short-term relief, Société Générale's FX analyst Kit Juckes reports.

Short-term GBP bounce possible, but temporary

"Nearly everything that can be said ahead of the UK budget has been said in the press. The fundamental issue for the FX market however, is the balance between fiscal and monetary policy. The so-called ‘Truss Affair’ has given the UK’s fiscal watchdog, the OBR, considerable power over fiscal policy, because this (Labour) government doesn’t have any previously earned fiscal credibility with markets."

"That in turn, means that the Chancellor is faced with the task of meeting election promises, satisfying the various cliques within the Labor Party, and delivering a Budget with a tight enough fiscal stance to meet her self-imposed fiscal rules, restore some headroom for spending and appease the OBR. The result is a budget with increased fiscal spending and increased taxation that overall, will open the door to easier monetary policy and a shift in the fiscal/monetary policy mix that is sterling negative."

"All of this is clear enough that much of what is coming in the Budget is priced into asset prices and unless the Budget scares the infamous ‘Bond Vigilantes’ there’s a chance that the pound will react positively in the short term. Any bounce however will be temporary as UK rates (at 4%) have more room to fall that Eurozone ones (2%). Currency, markets price around 10bp of ECB easing by the middle of next year, 60bp of Fed easing, and 50bp of BOE easing. 25bp cuts by the Fed and BOE in December will help the EUR against both GBP ad USD if they inspire the markets to price-in more easing than is currently expected in 2026."