Pound becomes worst G-10 performer on Budget concerns
Sterling suffered a sharp decline to become the worst-performing G-10 currency following reports that Chancellor Rachel Reeves may abandon plans to raise income tax thresholds in the upcoming Budget. The move reflects growing uncertainty around the government’s fiscal strategy as it grapples with a reported £35 billion funding gap.
The pound’s weakness comes despite relatively resilient UK economic data in recent weeks. Traders are growing increasingly concerned about the government’s ability to balance its fiscal commitments with market-friendly policies.
Currency markets had been pricing in a more predictable path for UK fiscal policy. However, the latest reports suggest a more complicated Budget ahead, with Reeves reportedly reconsidering several tax-raising measures. This uncertainty is weighing heavily on the pound against major currencies.
The sell-off in sterling also reflects broader concerns about the UK’s growth outlook. With the government facing tough choices on taxation and spending, investors are questioning whether the UK can maintain its economic momentum into 2025 and beyond.
Bank of England rate cut bets trimmed
Expectations for a December interest rate cut from the Bank of England (BoE) have been pared back, with traders now pricing in around a 75% probability of a reduction. This represents a notable shift from earlier expectations of a near-certain cut at the final policy meeting of the year.
The recalibration comes as markets digest mixed signals from the UK economy. While inflation has moderated, services inflation remains sticky and wage growth continues to run above levels consistent with the Bank’s 2% target. This gives policymakers pause about cutting rates too aggressively.
Recent comments from Bank officials have also suggested a more cautious approach to easing. The Monetary Policy Committee appears divided on the appropriate pace of rate cuts, with some members favouring a more gradual approach to ensure inflation is firmly under control.
UK property and retail show resilience
Land Securities upgraded its earnings guidance after reporting firm demand for both office and retail space. The property developer’s positive outlook suggests that the worst may be over for commercial real estate, despite broader economic headwinds facing the sector.
Rental demand has remained robust, particularly for prime office space in London. Companies are continuing to compete for quality locations as they adjust to hybrid working patterns. This sustained demand is helping to support valuations in a sector that faced significant pressure during the pandemic.
DFS reported strong order intake and expects robust first-half profit growth despite operating in a subdued furniture market. The retailer’s performance demonstrates that well-managed companies can still thrive even when their broader sectors face challenges. Cost control and efficient operations are proving crucial.
The resilience of both property and retail sectors offers some reassurance about the underlying health of the UK economy. While consumer spending remains under pressure from higher living costs, demand for goods and services has not collapsed. This provides a foundation for potential recovery.
Labour market signals continue to soften
A recent survey revealed muted pay growth and weaker hiring demand, aligning with other data pointing to a cooling UK jobs market. These signals suggest the tight labour market conditions that drove wage inflation higher may finally be easing, which could influence BoE policy decisions.
The softening in hiring demand reflects growing caution among employers about the economic outlook. Companies are taking a more conservative approach to headcount expansion as they navigate uncertainty around taxation, regulation, and consumer demand. This marks a notable shift from the aggressive hiring seen in recent years.
Pay growth is moderating from the elevated levels seen in 2023, though it remains above pre-pandemic norms. The deceleration is gradual rather than sharp, suggesting the labour market is cooling rather than cratering. This measured adjustment is what policymakers hoped to achieve through higher interest rates.
For the BoE, softer labour market data supports the case for eventual rate cuts. However, the gradual nature of the slowdown means the Bank can afford to be patient. Rushing to cut rates risks reigniting inflationary pressures before they are fully extinguished.
Global markets tumble on Fed hawkishness
Hopes for near-term Federal Reserve rate cuts evaporated following hawkish comments from Fed officials, sending US and Asian stocks sharply lower. The sell-off demonstrates the market’s sensitivity to any shift in the expected trajectory of interest rates, with investors quickly repricing their expectations.
Wall Street led the decline, with technology stocks bearing the brunt of the selling pressure. Higher rates for longer diminish the present value of future earnings, particularly for growth companies. This dynamic has been a recurring theme throughout 2024 as markets grapple with persistent inflation.
Asian markets followed the US lower, with Japanese and Hong Kong stocks posting significant declines. The global nature of the sell-off reflects how interconnected equity markets have become.
Commodities find support amid geopolitical tensions
Brent crude oil prices rose following a Ukrainian drone strike on a Russian oil facility, highlighting the ongoing geopolitical risks to energy supplies. The incident serves as a reminder that the conflict continues to pose threats to global commodity markets, even as it has faded from the headlines.
The attack targeted oil infrastructure, briefly disrupting supplies and triggering a knee-jerk reaction in crude prices. While the immediate impact was limited, the incident reinforces concerns about the vulnerability of energy infrastructure in conflict zones. This keeps a risk premium built into oil prices.
Gold edged higher but remained below its recent peaks, finding modest support from increased safe-haven demand. The precious metal continues to benefit from uncertainty around interest rates and geopolitical tensions. However, the opportunity cost of holding non-yielding assets limits gold’s upside while rates remain elevated.