Reckoning Days
Despite it being less than one week until Donald Trump’s inauguration, markets are still fixated on the evolution of the UK’s bond market and its currency. The Chancellor may well have been hoping for some distracting headlines from the incoming President-elect. Unfortunately for her, those that have come from the Trump administration and its entourage have been largely damning of this government. With her boss, our Prime Minister, failing to vouch for the security of her job yesterday she is in a tight spot with seemingly two options: raise taxes or cut spending. Both come with their own risks to her position as Chancellor.
Today and tomorrow, we will see auctions of fresh issuances of Britain’s 30-year and 10-year gilts respectively. With subscriptions falling, a weak cover ratio will be indicative of the concern surrounding this Parliament’s fiscal sustainability. There is a real risk moving into these actions that a lack of investor appetite could be exacerbated by the latest inflation and economic growth publications due out this week. Weak demand at these sizeable auctions could trigger further panic creating fresh pressure on the Pound.
If the threat of these auctions still are not enough for you to re-evaluate your GBP position, Reeves is due to address the House of Commons today regarding her latest trip to China. The Chancellor of the Exchequer is likely to spare the House the details of her sightseeing activities with MPs likely to push the debate in another direction – less Terra-cotta Warriors, more Terri-fying borrowing costs. At the time Reeves delivered her budget the OBR’s forecast was in line with market pricing: her budget left a £10Bn headroom for fiscal overshoot. This was always likely to spook the market and, despite a delayed fuse, is now coming home to roost in gilt markets. Based on today’s pricing that headroom now stands at minus £2bn, breaking this government’s fiscal pledges. Sterling is likely to extend losses in the face of a weak action but could recover ground if investor appetite is stronger than prior.
Discussion and Analysis by Charles Porter
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