UK Budget Forecasts Pressure Pound and Weaken Rate Hike Bets

By the end of October, the British pound changed hands around mid-1.3700 on fears of inflationary pressures and lingering energy issues amid the UK Budget forecast and spending review.

UK Budget forecast

According to UK Chancellor Rishi Sunak, the economy in 2021 will grow faster than expected, while unemployment and budget deficit projections have been revised downward.

Sunak provided a £75 billion ($103 billion) giveaway in a budget that contradicted forecasts of budget constraints and forecast growth in future spending patterns.

In a statement to parliament on Wednesday, Sunak lowered alcohol taxes, lowered taxes on pubs and restaurants, and increased incomes for some of the country’s poorest families. Taxes are now rising at their fastest rate since 1997.

He also pledged billions of pounds for infrastructure, education, and staff skills, adding to the budget of every State Department.

In the Budget statement, Sunak stated that according to projections from its Office for Budget Responsibility (OBR), the economy will likely grow by 6.5% in 2021, a higher rate than the 4.0% forecast made in March, when the UK was still in Coronavirus quarantine.

Following the country’s worst recession in the G7 in 2020, the 6.5% forecast was close to the IMF’s estimate that the GDP will grow 6.8% in 2021, the fastest growth among the G7 countries.

UK interest rate implications

According to John Hardy, currency strategist at Saxo Bank, a fiscal slowdown may put pressure on the pound, making a rate hike by the Bank of England less likely this week. However, the CME data shows that markets now expect a 62% chance of a rate hike next week, up from 71% last week.

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According to Sylvanas Tenreiro, a member of the Bank of England monetary policy committee, more time is required to assess how the end of the furlough scheme introduced to protect jobs has affected the jobs market. However, she does not see the urgency increased sees in the issue.

Brexit concerns

Nevertheless, the pound remains trapped in tight ranges amid headlines about EU-UK disputes over post-Brexit trade.

There are significant gaps between the two sides, and the European Union’s proposals to resolve the trade problem in Northern Ireland have not gone far enough, the UK said on Monday.

British pound forecast

The British pound has seen some mild support after the announcement of the budget forecast. The figures have been positive, showing further improvement in the UK economy.

However, the GBP/USD price is wobbling around 1.3750 area after finding lows around 1.3700 handle.

However, the probability of BoE’s rate hike has dropped slightly, limiting the GBP rallies. If we see a rate hike, the GBP/USD price may test at 1.3900 and above.