GBP: Budget Risks Threaten Dollar Gains - Nordea

Lead: Nordea strategists note that while sterling has recently been supported by external factors, the upcoming UK autumn budget is emerging as a key domestic risk threatening its rally.

**Budget Risk May Offset Rate Hike Benefits**

Nordea analysis suggests that the Bank of England holding rates at 3.75%, with a potential rate hike in November, could have provided support for sterling. However, a crucial autumn budget introduces significant uncertainty. Strategists emphasize that if the budget contains fiscal missteps, it could instead push UK gilt yields higher and exert depreciation pressure on sterling, thereby offsetting the positive effects of a rate hike.

**Diminishing Carry Advantage and External Drivers**

The firm also notes that sterling's carry appeal is weakening as interest rate levels shift. Since late February, EUR/GBP has traded consistently within a 0.84 to 0.87 range, with recent sterling gains driven more by external factors than by fundamental improvements in the UK itself. At the time of writing, EUR/GBP is trading near 0.84195, still within the aforementioned range.

**Economic Growth Resilience Provides Some Buffer**

Despite fiscal policy risks, Nordea also acknowledges that UK economic growth has shown resilience, providing some buffer for sterling. Markets are closely monitoring budget details, and any signs of deviation from fiscal discipline could quickly trigger a loss of confidence in UK assets, pressuring sterling lower from its current range.