Sterling inches lower ahead of highly anticipated UK budget

Sterling Weakens as Markets Anticipate UK Budget and Fiscal Strategy

Market Reactions and Anticipated Fiscal Measures

Sterling Performance Ahead of Budget Announcement

Oct 28 (Reuters) - Sterling dipped against the euro and the dollar on Wednesday ahead of a highly anticipated budget announcement that will detail how Prime Minister Andy Burnham's government plans to address the country's fiscal needs without rattling the bond market.

The pound eased 0.1% to a more than one-week low of $1.329, while it was also off 0.1% against the euro, at 83.7 pence. The single European currency hit its lowest since May 2025 against sterling on Tuesday.

Details of the Upcoming UK Budget

UK finance minister John Healey is expected to announce a cautious budget plan in parliament just after 1230 GMT that will detail how he plans to generate revenue to finance growth, including defence and artificial intelligence spending while also addressing the high costs of living pressuring the public.

Taxation and Revenue Generation

Banks, gambling firms and online marketplaces such as Amazon and Temu are expected to be hit with higher taxes at a time when budget forecasters have said fiscal headroom has shrunk to about £15 billion.

Spending Commitments and Fiscal Strategy

"Spending increases look set to be modest, with relatively small new commitments paid for by reallocating money from elsewhere rather than through extra borrowing," Matthew Ryan, head of market strategy at Ebury, said in a note.

Market Risks and Investor Sentiment

Potential Impact of Debt Reliance

Any indication of a heavy reliance on debt could spark a selloff in the pound and gilts, at a time when investor appetite for sovereign issuance in developed markets has been declining because of concerns about soaring public debt. A selloff in French bonds this month was a recent reflection of this sentiment. 

Government Fiscal Targets and Bond Yields

Healey has said he would stick to the government's fiscal targets. The yield on 30-year gilts was up 2 basis points, having eased slightly from the highest level since early 1998 hit earlier this month. 

Market Expectations for Sterling and Gilts

“For sterling and gilts, we see the bar for a positive surprise as high. With a market-friendly budget priced in, the path of least resistance is lower for the pound and bonds," Ryan said.

Broader Economic Context

Bank of England Rate Hike Expectations

Despite losses in recent sessions, sterling is marginally higher this month, buoyed by expectations that the Bank of England will hike interest rates by at least 25 basis points next month, LSEG-compiled data showed.

Global Market Focus: US Federal Reserve Decision

Later in the day, global markets will be focused on the US Federal Reserve's monetary policy decision, with a Reuters poll of economists anticipating no change.

US Interest Rate Outlook

However, traders see the central bank hiking interest rates by another 25 basis points in December,  the CME Group's FedWatch Tool showed.

(Reporting by Johann M Cherian in Bengaluru; Editing by Amanda Cooper and Kirsten Donovan)