Summary:
Sterling remained flat Friday ahead of Labour’s budget next week, with UK assets pressured by the party’s stance on potential tax changes.
Sterling was flat on Friday as Labour's first budget is due out next week. The party's refusal to rule out several potential tax changes has weighed on UK assets recently.
The Bank of England (BOE) may need to reevaluate its stance if fiscal policy remains tight enough to burden economic growth. However, optimism is rising regarding Chancellor Reeve's efforts to avoid austerity measures.
Economists anticipate that the central bank will cut rates more rapidly than previously expected, as recent data indicates that inflationary pressures are finally easing. As of Tuesday, money markets have fully priced in a quarter-percentage-point rate cut for the BOE's next meeting in November, with a high probability of a similar cut in December.
Goldman Sachs has forecasted rate cuts significantly below market expectations, predicting that the benchmark interest rate could drop to 3% by September 2025, down from the current 5%.
Recent figures revealed that services inflation fell from 5.6% to 4.9% in September, contributing to a decline in headline inflation to 1.7%—the lowest level seen in over three years.
The pound was trading well below its descending trendline and below the low of 1.3002 hit in 11 September, indicating the outlook remains dim. The initial support lies around 1.2900.
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