GBP does not have to rally a lot more on a credible budget – ING

Today's FX highlight will be the UK's Autumn Statement. Given that the UK's bond market has largely regained its composure from the sell-off in September, analysts at ING struggle to see what upside there is for Sterling today. Positioning could be the wild card, however.

EURGBP should find support near 0.86/87

“Investor views of UK fiscal credibility have largely returned to pre-Truss levels, where the 10-year German Bund-Gilt spread is now 115 bps (versus 228 bps in September) and the UK's 5-year sovereign CDS has narrowed to 27 bps from 52 bps. Arguably then, the positive re-assessment of the UK fiscal position has largely taken place and suggests that GBP does not have to rally a lot more on a credible budget.”

“A credible budget will deliver substantial fiscal tightening and cement views of a multi-quarter UK recession and one in which the Bank of England will continue to hike rates into 2023. As a pro-cyclical currency, this cannot be a good environment for Sterling.”

“We expect GBPUSD to be unable to hold any gains above 1.20 and prefer sub 1.15 levels before year-end. Equally, EURGBP should find support near 0.86/87.”

“The only thing going for Sterling is buy-side positioning. It is hard to see what Sterling positives the market could take from today's budget – but there is an outside risk that investors have some residual Sterling shorts to cover. Near-term outside risk is a very painful Sterling short-squeeze taking GBPUSD to 1.23. However, that squeeze should not last long.”