Sterling Drops vs Yen on UK Fiscal Headroom, BoJ Call

Key Moments

GBP Under Pressure Before UK Autumn Forecast Statement

The British Pound (GBP) is trading lower against the Japanese Yen (JPY) in Wednesday’s European session, slipping around 0.17% to roughly 209.70. The cross is weakening as traders position ahead of the United Kingdom (UK) Autumn Forecast Statement, with attention centered on the government’s fiscal stance.

Intraday Performance of GBP Against Major Currencies

The latest currency moves show the British Pound lagging its peers. According to the intraday performance snapshot, GBP has underperformed most major currencies, with the steepest decline registered against the Australian Dollar.

The associated heat map illustrates percentage changes among major currencies. The base currency is taken from the left-hand column, and the quote currency from the top row. The value shown at each intersection represents the percentage change of the base currency versus the quote currency. For instance, selecting the British Pound on the left and moving across to the US Dollar cell displays the percentage move in GBP (base)/USD (quote).

ABN AMRO: Markets Keyed on UK Fiscal Headroom

Economists at ABN AMRO anticipate that newly appointed Chancellor of the Exchequer John Healey will keep his first Budget on Wednesday relatively uneventful in terms of surprises. They remark that “rising debt-servicing costs, with Gilt yields near multi-decade highs, are eroding the Chancellor’s fiscal headroom… but the UK’s high inflation means wage growth is likely to be a crucial offset, making room for a potential positive surprise.” Within this framework, they foresee Healey “to prioritise rebuilding fiscal headroom, while balancing targeted tax rises with limited cost-of-living support.”

The bank underscores that “markets will be most focused on the size and credibility of the headroom that remains after the Chancellor’s budget decisions have been accounted for.” Given what they describe as the current “sensitivity in bond markets,” their central expectation is that Healey will “err on the upper end of credible headroom estimates of around £18-24bn, i.e. something not too far from Rachel Reeves’ last budget.”

ABN AMRO assesses that “the lower bound of a satisfactory figure for markets is probably around the £14-15bn mark,” and cautions that “below £14bn, the Chancellor risks a negative bond market reaction,” while “anything close to or above Reeves’ £24bn is likely to result in a positive market reaction.” They add that “much of the rise in gilt yields reflects the global repricing of interest rates,” but warn that “insufficient headroom could add a UK-specific fiscal risk premium on top of this.”

Fiscal Trajectory and Headroom Expectations

Reviewing recent fiscal developments, ABN AMRO notes that “headroom has been perilously low in recent years as the UK came under increasing fiscal pressure, though Healey’s predecessor Rachel Reeves worked hard to rebuild it.” They recall that “up until recently, headroom was forecast to decline sharply on the back of the jump in interest rates we have seen this year, from £24bn to around £13bn.”

Nonetheless, the bank “see room for a positive surprise, and this is linked to the Office for Budget Responsibility’s (OBR) wage growth assumption,” which supports their view that Healey will target headroom “on the upper end of credible headroom estimates of around £18-24bn.”

In bond markets, 10-year UK Gilt yields have retraced earlier gains ahead of the budget announcement but remain up by 0.18%, trading near 5.35%.

BoE Decision Seen as Next Catalyst for GBP

Beyond the fiscal announcement, the Bank of England’s (BoE) upcoming monetary policy decision is viewed as the next major event for the Pound. The central bank is widely anticipated to raise its policy rate by 25 basis points (bps) to 4% at next week’s meeting.

JPY Supported Ahead of BoJ as Markets Price In Future Tightening

The Japanese Yen is outperforming its major counterparts as market participants await the Bank of Japan’s (BoJ) monetary policy decision on Friday. The central bank is expected to leave interest rates unchanged at 1.25% at this meeting.

Brown Brothers Harriman: BoJ On Hold, Markets Eye December

Analysts at Brown Brothers Harriman (BBH) observe that the BoJ is “widely expected to keep rates on hold at 1.25% and assess September’s 25bps hike before tightening again.” They emphasize Governor Kazuo Ueda’s cautious approach, recalling that “in September, BoJ Governor Kazuo Ueda warned that rapid rate hikes could unsettle asset prices, adding that it could take some time to confirm that 2% inflation is entrenched.”

Despite that caution, BBH flags a more hawkish shift in market pricing, noting that “the swaps curve price in 75% odds of a 25bps BoJ rate hike to 1.50% at the December 18 meeting and nearly 75bps of tightening in the next twelve months,” a development they describe as supportive for the Yen.