GBP: UK Treasury eases market nerves – ING

The 10-year gilt stabilised around 4.80% yesterday, which has allowed the pound to partially recover after hitting a 1.224 low yesterday morning. What has helped calm market nerves was a comment by a top UK Treasury official who claimed ‘meeting the fiscal rules is non-negotiable’, ING’s FX analyst Francesco Pesole notes.

GBP/USD can attract buyers in the 1.225-1.230 area

“In practice, this means that since the rise in yields has eroded the fiscal headroom, Chancellor Rachel Reeves is more likely to deliver some fiscal consolidation should the updated OBR forecasts (released 26 March) show the government is not on track to meet the fiscal rule. That consolidation means higher taxes or lower spending – with the latter generally deemed more likely at this stage.”

“The market seems to be acknowledging the Treasury’s reiterated fiscal pledges and this has prevented the gilt and pound selloffs from becoming disorderly. As discussed in this note, this is not a sovereign crisis, and the rise in yields is – so far – justified.”

“This suggests we can expect some short-term respite for the pound. In the coming months, we expect fresh pressure on GBP on the back of much larger easing by the Bank of England compared to pricing; which may coincide with the fiscal tightening mentioned above. Today, the US leg could add some extra pressure on GBP/USD, but if gilts have another quiet session, the pair should attract buyers in the 1.225-1.230 area.”