Sterling whipsaws as OBR previews Budget: GBP/USD dips to 1.3136 while gilt yields climb
The pound reversed an early pop above 1.3200 after the UK’s fiscal watchdog published projections ahead of the Autumn Budget, flagging higher taxes and extra spending. Traders sold sterling and gilts on the headline mix, pushing GBP/USD to 1.3136 and the 10-year gilt yield back up to 4.53%.
At a glance
- GBP/USD slipped to 1.3136 after an initial jump above 1.3200.
- UK 10-year gilt yield rebounded to 4.53% from 4.43% intraday.
- OBR projections point to about £26bn in tax rises.
- Fiscal headroom estimated near £22bn, with almost £12bn in extra spending by the period’s end.
- Markets read a tighter—but not strictly austere—fiscal stance that could lift term premia and weigh on sterling.
What happened
The Office for Budget Responsibility published fiscal forecasts shortly before the Chancellor’s statement, effectively previewing the UK Budget. The projections imply around £26 billion in tax increases, leaving roughly £22 billion of fiscal headroom. Despite that cushion, planned outlays rise by nearly £12 billion by the end of the forecast period, hinting at a tightening bias offset by targeted spending.
Market reaction
Sterling initially rallied on the prospect of fiscal credibility but quickly reversed as traders weighed the implications for growth and gilt supply. GBP/USD fell to 1.3136, with intraday volatility elevated as liquidity thinned around the headlines. In rates, gilts sold off—10-year yields rose to 4.53%—as investors priced a stickier term premium and potential issuance risks.
FX take
For FX, the signal is mixed: a firmer fiscal anchor may soften medium-term inflation risk, yet higher gilt yields and uncertainty around execution keep sterling sensitive to risk sentiment. Near term, GBP/USD is caught between a cautious global backdrop and domestic policy noise. Momentum sellers will eye the 1.31 handle as support, while bulls need a sustained break back above 1.3200 to regain control.
What to watch next
- Final Budget details from the Chancellor, including any changes to the gilt remit.
- Market depth and auction results in the gilt market.
- Bank of England rhetoric on the growth-inflation trade-off post Budget.
- Incoming UK data that could recalibrate rate-cut expectations.
Q&A
Why did GBP/USD drop after the OBR release?
The projections flagged higher taxes alongside additional spending, a mix that lifted gilt yields and revived growth and supply concerns. That pushed investors to fade sterling’s initial relief rally, sending GBP/USD down to 1.3136.
What were the headline fiscal numbers?
The OBR pointed to about £26 billion in tax increases, fiscal headroom of roughly £22 billion, and close to £12 billion more spending by the end of the forecast horizon.
How did UK gilts react?
Gilts sold off after an initial rally, with the 10-year yield moving back up to around 4.53% from 4.43% earlier, reflecting a higher term premium and caution on issuance and growth.
What does this mean for the Bank of England?
A somewhat tighter fiscal stance can ease inflation pressure at the margin, but if yields stay elevated and growth softens, the BoE’s path could remain data-dependent. Traders will parse BoE commentary for any shift in rate-cut timing.
What are the key GBP/USD levels to watch?
Immediate resistance sits near 1.3200 after today’s failed break. Initial support is around the 1.31 area; a clear move below could expose deeper downside if risk sentiment weakens.
What should traders monitor next?
The final Budget statement, any changes to gilt issuance plans, and the next batch of UK data. Liquidity conditions around the announcements can amplify FX and rates volatility, a theme BPayNews will track closely.
