GBP/USD dropped to its lowest level since April, as UK Chancellor Rachel Reeves signaled upcoming tax increases in the Autumn Budget, potentially creating room for further Bank of England (BoE) easing, according to BBH FX analysts.
Chancellor Signals Fiscal Tightening
- Chancellor Reeves indicated that tax hikes are expected in the budget scheduled for November 26.
- The anticipated fiscal drag may allow the BoE to pursue more monetary easing than currently priced in by markets, which is roughly 50 basis points over the next 12 months.
- This announcement has added downward pressure on the Pound, pushing GBP/USD to April lows.
BoE Policy Outlook
- The next BoE policy decision is on Thursday, with market swaps implying a 30% chance of a 25bps rate cut to 3.75%.
- BBH expects the BoE to wait until after the budget before resuming rate cuts.
- Meanwhile, UK inflation remains nearly double the BoE’s 2% target, and leading indicators suggest that Q3 GDP growth (due November 13) may exceed the BoE’s 0.3% quarterly projection.
