Pound under pressure amid Budget fallout

This Halloween, the ghost of mini-budget past haunts Labour's daring fiscal gambit, with Gilt yields surging skyward and Sterling finding itself on shaky ground. Consequently, the new government's borrowing costs will have soared in the wake of the budget and accompanying OBR report, which called this one of the largest loosenings of any fiscal event in recent decades. Looking forward, the pound remains precariously positioned, with any signs of waning confidence from international investors potentially triggering a more severe sell-off in the bond market. This weakening is not helped by a resilient Dollar, leading sterling to fall to a two-month low against USD despite general market uncertainty surrounding the upcoming election. In equity markets, the initial reaction was far from universal, with the AIM rallying as changes to IHT proved less severe than feared, however today, markets have come firmly into agreement, all to the downside, as the fiscal alarm bells begin to ring.

Yields on UK 10-year gilts have reached a 12-month high, surpassing levels seen after the Kwasi Kwarteng mini-budget of September 2022. This signals potential increases in interest rates, higher mortgage payments, and more costly borrowing for consumers and businesses, compounded by a £40bn tax increase that raises the overall tax burden to its highest since 1948.

The negative reaction in the bond markets is likely to continue with the OBR predicting that borrowing will average £36 billion higher annually over the next five fiscal years, given the time it will take for the additional tax revenue to come through.

In the currency markets, the Pound has dropped significantly, hitting a 6-week low against the Euro and a 10-week low against the Dollar, losing over 4% in October alone, raising concerns that history is about to repeat itself.

Just over two years ago, following the mini budget, the Pound fell to its lowest value against the Dollar since 1985,