The British pound is in a precarious position as investors focus their attention on the November Budget, according to analysts at Bank of America (BofA). Despite some key economic data releases last week, market reaction has shown that the current macro data is barely reflecting the risks of political and fiscal events.
BofA stressed that the market pattern is changing, with the pound falling on the back of a widening budget deficit despite better-than-expected retail sales. The negative correlation between sterling and 10-year gilt yields has also worsened the situation, with both assets selling off simultaneously.
The latest budget figures revealed that public sector borrowing hit £18bn in August, exceeding the OBR’s forecast by £5.5bn. Cumulative borrowing for the fiscal year now stands at £83.8bn, exceeding the target by £11.4bn. This situation risks turning the government’s fiscal space into a deficit if no countermeasures are introduced.
However, BofA expects the pound to recover after the Budget as the risks of events have receded. The bank also sees opportunities in the EUR/GBP trade, but stresses that a significant rise in the pound is unlikely to occur before November.
