GBP: High-stakes Budget is here
UK Chancellor Rachel Reeves will unveil her autumn Budget today, with a “smorgasbord” of tax hikes aimed at plugging a £30bn hole in the public finances. But the real drama may only begin once she sits down, as gilt markets and the pound brace for reaction. Raise taxes too aggressively and investment risks stalling; fail to close the fiscal gap and the spectre of 2022’s bond market turmoil and a plunging pound looms large.
Yields tell the story of unease. The 10‑year gilt yield has eased in recent months but still sits at 4.5% — the highest in the G7 — while the 30‑year still hovers near levels last seen in 1998. Borrowing costs are climbing across advanced economies amid sticky inflation and weaker growth, but the UK’s fiscal position is drawing particular scrutiny, with debt close to 100% of GDP. Earlier this month, investors recoiled after reports Reeves had abandoned plans for a manifesto‑busting income tax rise, underscoring the fragile confidence she must now restore.
Now, it seems, Reeves is opting for a patchwork of smaller, more intricate measures: freezing thresholds, levying high‑end property, and introducing niche charges like the tourist tax. But the risk is that markets view it as piecemeal tinkering. Complex, fragmented hikes can be harder to model, harder to sell politically, and may not deliver the clarity investors crave.
That’s why gilt traders are so focused on the aftermath — if the package looks like a muddle, the fiscal risk premium could persist, keeping yields elevated and sterling fragile. Conversely, if Reeves can frame these smaller measures as part of a coherent, credible path, she might just buy herself breathing space.
Why did the pound strengthen yesterday? Sterling’s resilience was less about conviction and more about positioning. Investors have been running heavy GBP shorts over the last few months, reflecting the sizeable risk premium embedded in the currency. With the Budget looming as a potential inflection point, traders are reluctant to be caught flat‑footed by any upside surprise. Thus, though there are plenty of pitfalls ahead, with so much negativity baked into sterling’s price of late, the risk is not only of a stumble, but also of a relief rally if Reeves can convince markets that fiscal credibility is intact.
Purely from a technical lens, GBP/USD jumped and closed back above its 21-day moving average for the first time in over a month. That break signals a shift in short‑term momentum, but whether it sticks depends on Reeves’ fiscal credibility. Buckle up.
USD: Dollar sinks as hollow dovish bets gain colour
The US dollar struggled yesterday as a confluence of factors weighed on the currency. Retail sales undershot expectations – headline at 0.2% vs. 0.4% est., and the control group (less volatile) at -0.1% vs. 0.3% est. – pointing to cooling spending momentum. The data contrasts sharply with prior months of robust spending, raising concerns over the yet‑to‑be‑published Q3 GDP print. Recall that strong private consumption did most of the heavy lifting in the upwardly revised Q2 growth. Meanwhile, the Conference Board sentiment index fell to its lowest since April, underscoring anxiety over the softer labour market and sticky prices. Yet we realise the gloom here may be overstated: the survey was collected through November 18, coinciding with the government shutdown, which likely skewed responses.
Policy risk added to the dollar’s woes. Reports suggest White House NEC Director Kevin Hassett is the frontrunner to chair the Federal Reserve. His proximity to Trump and alignment with a low‑rate stance would reinforce dovish expectations – no support for the greenback there.
The paring back of recent dollar gains – arguably exaggerated by safe‑haven demand in recent equity risk‑off conditions – therefore makes sense. Put differently, the current market pricing of an ~92% chance of a rate cut now carries greater data‑driven weight than it did last week (when it hovered around 80%) – it is better justified and ultimately more effective in driving the dollar lower.
With no major data releases scheduled today (aside from weekly jobless claims), attention shifts to this evening’s Beige Book. Anecdotal evidence is likely to echo themes of weaker sentiment and sticky inflation suggested by recent data, adding more texture to the outlook. We expect the dollar to continue grinding lower, with the DXY still overvalued relative to where rate differentials point.
EUR: EUR/USD eyes 1.1650 break
The euro strengthened 0.4% against the dollar yesterday, outperforming across the G10 space. The currency was supported both by weak US macro data and continued developments around a potential Ukraine–Russia ceasefire.
Following pressure from Ukraine’s European allies, the US has revisited its original peace plan, reworking it with Ukrainian officials during Geneva talks. Initially rejected by President Zelenskyy, the plan had included concessions that seemed heavily geared towards Moscow’s longstanding demands. Russia has yet to accept the revised changes, however, raising doubts over Moscow’s readiness for a ceasefire, particularly as both sides have continued to exchange fire despite ongoing peace efforts. Trump’s envoy Steve Witkoff is heading to Moscow next week to meet President Putin in hopes of finalising a plan, while President Zelenskyy has signaled readiness to meet Trump to discuss outstanding “sensitive points.”
EUR/USD pulled back from seemingly overstretched lows near 1.15 and is poised to test 1.16, with 1.1650 emerging as a more concrete resistance level. That threshold has capped the pair’s range-bound trading since mid-October, but the euro now appears better positioned to challenge it. The release of US macro data – delayed by the shutdown – could provide the catalyst for a breakout and re-engage the pair in a more pronounced bullish move.
Market snapshot
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: November 24-28
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
