The pound sterling was largely stable on Thursday, the day after Finance Minister John Healey announced a budget that included cautious tax and spending plans, with the aim of helping families affected by “global economic storms,” amid a limited impact on British markets.
Healey said he would raise taxes on banks, savers, and owners of rental properties, in addition to tightening value-added tax rules on online marketplaces, such as Amazon and eBay, as well as introducing measures to mitigate the impact of rising energy bills, according to Reuters.
The pound sterling, which is considered the best performing major currency against the dollar this month, recorded gains amounting to 0.52 percent, while it stabilized in the latest transactions at $1.3325. It also achieved similar gains against the euro during October, pushing the single European currency to its lowest level in 17 months.
The euro fell in recent trading by 0.1 percent to 83.62 pence, ahead of the European Central Bank's monetary policy decision, which is expected to keep interest rates in the euro zone unchanged later Thursday.
Haley said on Wednesday that he would use part of the financial margin available to him to achieve his main financial goal, which has been reduced to 15 billion pounds ($20 billion), compared to a previous estimate of 24 billion pounds, while fulfilling his commitments to reform public finances despite the shock resulting from the war with Iran.
“The continuity budget, combined with the possibility of increasing available financial margin, pushes the perceived financial risks of sterling to the background,” Lefteris Farmakis, FX strategist at Barclays, said in a note covering the budget generally.
Investors and analysts saw, on Wednesday, that the budget made no significant change in the prospects for British public finances, which may be considered a positive development.
“We believe that today’s budget allows the pound to continue to benefit from lower political uncertainty in the UK compared to other regions,” BNP Paribas strategists said in a note. We continue to bet on the rise of the pound against the dollar.”
The budget did not make a fundamental change in the markets’ expectations regarding the Bank of England’s meeting next week. Money markets are fully pricing in the possibility of the bank raising interest rates on November 5, and they are fully pricing in the possibility of implementing a second increase by February, according to money markets.
The US Federal Reserve had left interest rates unchanged the previous day, as was widely expected, preferring to postpone any adjustments to borrowing costs until after the US midterm elections scheduled for next week, pending further data on inflation, which the central bank said “remains high.”
Government bond yields in the euro zone fell slightly on Thursday, affected by oil price movements, as investors awaited the European Central Bank's monetary policy meeting later in the day.
Brent crude futures fell on Thursday, giving up some of the gains recorded the previous day, after media reports reported that US Vice President J.D. Vance sought to revive peace negotiations by sending a message to Mohsen Rezaei, head of Iran's Supreme National Security Council.
Investors expect that the European Central Bank will not provide any guidance on the path of interest rates in the next stage, according to Reuters.
In early October, traders reduced their bets on the European Central Bank raising interest rates in the future, while these expectations have largely stabilized since then. Euro short-term interest rate (ESTR) futures indicate expectations that the deposit rate will rise to 3.23 percent by late 2027, and to 2.73 percent by December, from its current level of 2.50 percent.
Harry Jones, portfolio manager at Insight Investment, said that the eurozone faces an increasing mix of pressures, represented by resilient economic growth and renewed inflationary pressures resulting from rising energy prices. He added that the European Central Bank may have to tighten monetary policy further if the shock persists.
But he pointed out that keeping inflation close to the target level gives policy makers room to evaluate the inflationary effects of the second round.
Jones explained that the danger lies in the fact that excessive tightening of monetary policy at the present time will weaken economic growth to a degree that may require a rapid reversal of this policy in 2027.
Second-round inflationary effects occur when an initial price shock, such as a sharp rise in energy prices, leads to broader increases in wages and prices, keeping inflation high even after the original shock has passed.
The 10-year German government bond yield, the benchmark for bond yields in the euro zone, fell by 2.5 basis points to 3.36 percent.
The two-year German bond yield, which is most affected by interest rate expectations, also fell by 3.5 basis points to 3.07 percent, after US borrowing costs fell during Asian trading.
The US Federal Reserve kept interest rates unchanged on Wednesday, as expected, preferring to postpone any adjustments to borrowing costs until after the US midterm elections scheduled for next week.
The difference in yields between French government bonds (OAT) and their German counterparts (Bunds) settled at about 153.50 basis points, after reaching 177.70 basis points last week, recording its highest level since November 2011.
