The announcement of the UK budget has caused major jitters with investors—especially about the government’s plans to finance extra expenses. Shadow Chancellor Rachel Reeves has already been deservedly called out for not showing her own financial hand. In short, this oversight has recently raised fears of a potential GBP sell-off. As markets prepare for the fallout of this budget, several different potential futures have developed that could determine investor reception.
Reeves’ failure to provide a roadmap on where the money will come from has left many wondering whether the initiatives would be sustainable. For one, investors are understandably wary about funding things that lack significant financial support. They understand that these situations lead to severe volatility in the currency market. The absence of a credible and well-thought-out roadmap has led to uncertainty over what GBP will ultimately be worth. Analysts are now cautioning that this uncertainty is setting the stage for a big sell-off.
Even with all of this going on, financial markets are still a little too complacent for my taste. Perhaps the best-case scenario would be the publication of more upbeat UK economic growth forecasts. Only if government can deliver results that are beyond doubt showing a strong recovery path will trust with the capital markets be regained. On top of this, optimistic predictions about UK productivity might add to the upbeat spirits on the market.
The second major factor that will determine how investors react is the magnitude of the fiscal gap that the budget shows. If the government can demonstrate that the fiscal gap is smaller than previously feared, it may alleviate concerns about financial stability. A bigger fiscal gap would be a bad sign because it would show that the government is less able to afford its financial obligations. That kind of improvement would dramatically increase GBP’s value.
Beyond these more appeasing and enticing aspects, though, is the fact that some scenarios will be completely intolerable to investors. If the budget can’t be used to create growth and productivity, then the market will probably impose its own punishment. Large fiscal gaps are sure to raise the alarm bells in the investment community as well. This would sharpen volatility in GBP and further cloud the overall economic picture.