British Pound: Seen weakening against Euro on hawkish BoE pricing – ING

ING strategist Francesco Pesole reports that Sterling gained modestly, helped by Chancellor John Healey’s first major speech stressing fiscal discipline and keeping long-end gilt moves aligned with global bond selling. While EUR/GBP is seen with a positive bias due to perceived overly hawkish Bank of England expectations, the UK government is viewed as sensitive to market reactions ahead of October budget headlines.

Sterling steady on fiscal reassurance

"Sterling enjoyed a decent session yesterday, with some marginal support potentially coming from Chancellor John Healey’s first major speech. He delivered a firm message on fiscal discipline, helping to keep the increase in long-end gilt yields broadly in line with the wider global bond sell-off."

"That stance is likely intended to reassure markets ahead of what could be a steady flow of headlines about the October budget in the weeks ahead."

"How far those headlines test the market remains to be seen. Sterling is currently pricing in no fiscal risk premium, leaving some scope for market concern to emerge."

"Even so, the government appears highly conscious of market sensitivities and unlikely to engage in a serious confrontation with the bond market, particularly given how quickly higher yields can consume any available fiscal headroom."

"We retain a positive bias on EUR/GBP primarily due to our assessment that Bank of England expectations appear way too hawkish."