British Pound: Budget calm and BoE outlook offer support – Commerzbank

Commerzbank's Michael Pfister notes that the British Pound's (GBP) primary focus is the new UK budget presented by Prime Minister Andy Burnham. Markets have been relieved by the more cautious fiscal messaging in the budget. Recent labor market and inflation data have bolstered expectations of an upcoming Bank of England (BoE) rate hike, which has already been largely priced in.

UK government bonds are currently trading closer to German debt than French debt, providing further support for the Pound. While the budget may not lead to significant progress, as Burnham has stated major changes would only occur following a potential re-election, the relative calm in the budget's presentation is likely to be well-received by market participants.

August labor market figures revealed a significant drop in the unemployment rate from 4.9% to 4.7%, while September job creation was stronger than expected, with 13,000 jobs created instead of a loss of 8,000. Given the combination of rising inflation, a slight improvement in the labor market, and strong growth figures this year, the Bank of England is likely to raise interest rates next week.

The market anticipates three further hikes by the middle of next year, which has further boosted the pound's value. Despite concerns about a potential European sovereign debt crisis, UK government bonds have been trading more like German bonds than French ones, benefiting the pound.