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Strength of Sterling to be tested by autumn Budget

27 Oct 2021

The GBP/EUR rate gained 0.28% on Tuesday, hitting the 1.1900 mark, ahead of the UK’s autumn Budget being delivered on Wednesday. Pre-Chancellor Rishi Sunak’s announcement, the Pound to Euro exchange rate was trading at 1.898, whilst the Pound to Dollar exchange rate hit 1.3829.

"For Sterling, we need to make sure that Sunak’s announcements do not cause markets to reprice their expectations from the near-term Bank of England meetings that have been supporting Sterling," said Jeremy Thomson-Cook, Chief Economist at Equals Money.

It has already been announced before the Budget that more than five million public sector workers are due for a pay rise in 2022 as the pandemic pay freeze comes to an end.

There will also be an increase to the National Living Wage from £8.91 to £9.50 an hour, Pound Sterling Live reports, making up an additional £1,000 a year for a full-time employee, with 2.5 million people set to benefit.

"The British Pound hit a new 2021 high versus the Euro... in fact, it’s the highest level since the pandemic-induced market turmoil in March 2020," according to George Vessey at Western Union Business Solutions.

Furthermore, the Pound outperformed, despite market pricing showing the probability of a rate hike next month easing from recent highs.

Many foreign exchange analysts have cautioned that a price reversal would be consistent with a weaker Pound. Yet Sterling has hit a fresh 2021 high against the Euro and moved back over 1.38 against the Dollar.

"Month-to-date, Sterling is outperforming the Euro by about 2%, on track for its second biggest monthly gain in two years," Vessey added.

Even though many spending plans have already been leaked by the Treasury, it isn’t yet known whether this Budget will be consolidative or expansionary.

"Despite the headline spending pledges dropping prematurely onto newspaper headlines, the details of the budget remain obscure. The Chancellor will be expected to provide more clarity to the House tomorrow and it is therefore possible we see a stronger reaction in GBP over subsequent trading sessions," commented Charles Porter, analyst at SGM Foreign Exchange Ltd.

An expansionary Budget is typically supportive of the Pound, and a consolidative Budget may pose headwinds.