Sterling remains so tightly pegged to the euro. For example, the GBP/EUR currency pair has barely moved at all over these last few months. This stability comes in the context of heightened economic uncertainty in Britain. In August, the economy posted a very weak growth rate of just 0.1%. It’s evident that investors are moving with a lot of caution, analysts note. They are waiting to make major moves as they wait for the government’s new budget, expected in November.
The British economy has had a rough go, weighed down by recent tax hikes and an ongoing bout with inflation. All of these factors have led to a deal drought that has spooked many a would be investor. Consequently, they are all raising their guard over the pound. They want to see clearer signals from the government before acting.
The next budget, which is due to be released within the next month, is being seen as crunch time for UK assets. Investors are especially eager to see how the new administration will respond to our nation’s many economic challenges. Earlier this week, the government all but ruled out tax increases for this week’s budget. This announcement has led to increased speculation about the budget’s effect.
Therefore, market observers are expecting a relatively benign rise in net new public borrowing, bringing up concerns of fiscal sustainability. There is equally strong pressure from capital markets investors for states to commit to at least token forms of spending reductions. How this delicate balance is struck may well be key to where the pound heads next.
Thursday’s monthly GDP data was not enough to move the needle on market sentiment. More than that, it underlines how fragile Britain’s economic recovery remains. Investors are clearly adopting a wait-and-see approach, tightly crossing fingers that next month’s budget will shed some much-needed light and direction.