GBP: Tighter fiscal, looser monetary policy to hit sterling – ING

UK Chancellor, Rachel Reeves, delivers her 30-minute Spring Statement at 13CET. The crux of the story is how she will likely cut spending for the UK to meet its fiscal rule. Widely trailed in the press is the need to rein in about £15bn of spending through welfare and other departmental spending cuts, ING’s FX analysts Chris Turner notes.

GBP/USD looks vulnerable to 1.2860 and possibly 1.2800 today

"Where the jeopardy lies for the Chancellor is with the bond market. Should spending cuts be far too back-loaded to be credible, or if the government sails too close to the wind with its gilt issuance plans, we could see a repeat of January's gilt and sterling sell-off."

"For reference, consensus in the bond market is that gilt supply for FY25/26 will be around £302/304bn, with some estimating it could be as wide as £320bn. With UK 10-year gilt yields already at 3.75% and underperforming US Treasuries, any £320bn gilt issuance figure (likely announced around 1330CET) would hit sterling."

"At the same time, it looks like the market is under-pricing this year's Bank of England easing cycle. The market prices just 40bp of easing, while we see a risk of three more 25bp cuts. The narrative of tighter fiscal and looser monetary policy should be sterling negative. GBP/USD looks vulnerable to 1.2860 and possibly 1.2800 today."