The pound struggled to gain against the weakening dollar on Thursday, as investors began pricing in the effects of the November budget.
Despite the US government shutdown putting pressure on the dollar, the pound stabilized at 1.3478. Against the euro, it fell 0.13% to 87.15 pence.
UK Chancellor of the Exchequer Rachel Reeves will try to stick to fiscal targets in the budget to be announced on November 26. However, new tax increases could put pressure on the fragile economy.
Reeves’ request last year for an additional £25 billion in social security contributions from employers is still fresh in people’s minds.A perception of a “risk premium for the pound” has begun to emerge in the markets. Analysts emphasize that high borrowing costs could force the government into tax increases and spending cuts. This situation is reducing investors’ appetite for the pound.
On the other hand, according to the Bank of England’s (BoE) survey, businesses’ employment plans are at their weakest level since 2020. Consumer prices are expected to rise at their fastest pace since the beginning of 2024. Markets are pricing in the possibility of two interest rate cuts next year.
As a result, the pound is expected to consolidate near the 1.35 level; however, pre-budget uncertainties continue to put significant pressure on the currency.
