Skip to content 
In my view, the British pound (GBP) is facing growing downside risks due to a combination of potential faster rate cuts by the Bank of England (BoE) and concerns surrounding the upcoming budget. These factors are contributing to the increasingly bearish outlook on GBP.
Market Correction in GBP:
The recent decline in the pound can be linked to a mix of external geopolitical factors and domestic economic fundamentals. Escalating tensions in the Middle East, particularly involving Israel and Iran, have created uncertainty in the markets, prompting traders to reduce long GBP positions. The cautious sentiment reflects fears that the volatility may persist, which is putting pressure on the pound.
Volatility Weakens GBP’s Appeal:
Increased volatility in financial markets further diminishes the attractiveness of long GBP carry trades. If energy prices spike again, it could add strain to the UK economy, reinforcing the negative sentiment surrounding GBP. The UK is particularly sensitive to rising energy costs, and this risk compounds the challenges already faced by the economy.
Dovish Signals from the BoE:
BoE Governor Andrew Bailey has recently made dovish remarks, suggesting the possibility of accelerated rate cuts if inflation continues to show signs of easing. I believe we could see consecutive rate cuts as early as November and December, which would put additional downward pressure on the pound. MUFG shares this view, supporting the idea that faster rate cuts are likely and could weaken GBP further.
Budget Concerns:
The upcoming budget on October 30 from the Labour government adds another layer of uncertainty. There is growing anticipation that new tax measures may be introduced to cover a projected £22 billion overspend. Public and market reactions to this budget will be critical in determining the pound’s trajectory. Any unfavorable response to potential tax increases could further drag on GBP.
Conclusion:
In my analysis, the combination of geopolitical risks, a dovish stance from the BoE, and uncertainties around the budget suggest significant downside risks for the GBP in the near term. MUFG’s outlook aligns with mine, as they also foresee potential weakness in the pound under these conditions. Market participants need to stay alert and monitor these developments closely, as they will likely play a key role in GBP’s future direction.
