Chancellor Rachel Reeves delivers the Autumn Budget 2024. Picture by Lauren Hurley / DESNZ.
The British pound is seen at risk of further weakness against its two major rivals, although a rebound after the budget is possible.
Currency analysts tip the pound to remain pressured against the major currencies in the coming days and weeks, blaming pre-budget uncertainty for the underperformance.
"We expect GBP to underperform G10 peers leading up to the November 26 budget given extremely tight fiscal headroom," says Jayati Bharadwaj, Head of FX Strategy at TD Securities.
The pound has been under multi-week pressure against the euro and dollar, but stabilised on Thursday when the Bank of England maintained its base interest rate at 4.0%, although it indicated it will likely cut interest rates in December.
The pound to euro conversion has now recorded three successive weeks of declines, ending Friday at 1.1364/ The pound to dollar conversion closed the week at 1.3160, having been as low as 1.3010 ahead of the Bank's decision.
The currency's grind lower comes on the back of steadily rising odds of a rate cut before year-end, as it becomes increasingly clear the government will raise income taxes in the budget. This is expected to squeeze demand for the economy, which will help the Bank of England bring inflation down.
"A bold tax hike should lower gilt yields and could allow the BoE to go further with cuts," says Neil Wilson, an analyst at Saxo Bank.
He explains this will be a contractionary fiscal blow to the economy: "fiscal tighter, monetary looser suggests sterling remains on back foot."
The Times reports the government will raise the basic rate of income tax by 2p, breaking the Labour Party's manifesto pledge that it wouldn't do so.
"We hold a bearish outlook on the GBP and expect it to lag other currencies. We expect it to trend lower over the medium-term," says Joshua Wilcock, G10 FX Strategist at BNP Paribas.
However, there could be some festive cheer for Sterling: Kiran Kowshik, Global FX Strategist at Lombard Odier, points out that "historically, sterling tends to weaken heading into the Budget but sees relief thereafter."
Post-budget Bounce
Pre-budget uncertainty is likely to weigh on sterling into the budget, but the lifting of that uncertainty could allow the under-pressure currency the chance to rise in December, making for a cheerier end to the year.
"The bar for a credible Budget is by now not particularly high, the pound is cheap versus rates, and shorts are likely crowded," say FX analysts at Barclays, adding they are more optimistic on the pound's prospects "further out".
Kamal Sharma at Bank of America also sees a more constructive set-up once the fiscal event has passed:
"The Budget is the binary event of the year and its outcome will be critical to whether GBP can reassert its link to some of its historical relationships. In our view, options skew remains bearish for the pound, but we sense from the recent news-flow that the risks are rising for an upside surprise."