Institutional Warning: UK Fiscal Tightening Dragging Down Pound, Current Resilience May Come to an End

⑴ Core Risk: UK Chancellor of the Exchequer Hunt will release the budget on Wednesday. If the focus is on strictly controlling the deficit by sharply cutting expenditures and sacrificing economic growth, the current strength of the pound will be tested. ⑵ Morgan Stanley View: The Morgan Stanley FX team points out that the positive factors for the pound are already fully priced in, and the market is overly optimistic about the budget outlook; they anticipate GBP/USD to fall back to 1.30 by the end of the year (currently around 1.33), and continue to weaken into 2027. ⑶ Other Investment Bank Consensus: BBVA and Crédit Agricole are also bearish, both setting year-end targets for GBP/USD at 1.31, and projecting that GBP/EUR will decline in tandem; earlier volatility in the French bond market has already weighed on the euro, so the pound is unlikely to gain support. ⑷ Main Market Theme: This budget centers on fiscal prudence. If tightening exceeds expectations, expectations for UK economic growth will be revised down, further weakening the pound's appeal.