Downside risks continue to dominate sterling – Commerzbank

The British Treasury Secretary Kwasi Kwarteng announced on Monday that the top tax rate of 45% was not going to be scrapped after all. Sterling reacted positively to the news. However, economists at Commerzbank expect the GBP to remain under pressure.

Scepticism about sterling

“One could merely deduct that the fact that Kwarteng reacted to the pressure of the financial markets was appreciated by them. Perhaps there is speculation that this is only the beginning and that he will make further concessions. However, that is probably a relatively optimistic view, as it seems that Kwarteng was mainly interested in keeping face after huge criticism for the top tax rate plans emerged even from within his own party.”

“At least Kwarteng announced that he would bring forward a detailed presentation of his fiscal plans. It is difficult to imagine though that he will be able to convince the financial markets of the sustainability of British state finances if he largely sticks to his tax cut and spending plans.”

“Against this background, we remain sceptical about sterling. In our view, the downside risks continue to dominate.”