Budget Won't Throw Pound-Euro Off Course: Danske Bank

The Autumn Budget 2024. Treasury. Picture by Kirsty O'Connor / Treasury.

The budget could provide some jitters for Pound Sterling but won't derail the trend of appreciation.

This is according to a pre-budget assessment by Danske Bank. In the absence of a major surprise, we stay positive on GBP for the months ahead," says Mohamad Al-Saraf, an analyst at Danske Bank.

The Pound to Euro exchange rate has found renewed support above 1.20, momentarily testing 2024 highs at 1.2050 yesterday.

The Labour government's first budget will be announced at around 12:30 GMT and will be accompanied by an independent report by the fiscal watchdog OBR.

"We will likely see a budget that is more expansionary than what the previous Conservative government set out back in the spring," says Al-Saraf.

Some analysts think the government will deliver a looser fiscal policy in the October 30 Budget, despite announcing significant tax hikes, which can boost GDP by 0.5% in 2025/26.

Al-Saraf explains this will give the Bank of England a lot to process at its upcoming meeting on November 07, and to what extent the budget might alter the inflation outlook.

"We think a more expansionary budget should keep the BoE more cautious with its easing cycle for the rest of the year (cut Nov, hold Dec). In terms of market reaction, we think UK yields could move higher across the board with a step up in issuance expected along more expansionary fiscal measures," he adds.

Danske Bank thinks the GBP FX impact is not as clear as decreasing odds of a December rate cut would prove GBP positive.

However, the potential for jitters on new debt measures and increased borrowing could prove GBP negative.

"The budget will still be accompanied by a report by the OBR, which Liz Truss' Mini budget was not. In the absence of a major surprise, we stay positive on GBP for the months ahead," says Al-Saraf.