The UK’s bonds and currency pulled back on Thursday from a rally following Chancellor Rachel Reeves’s budget.
Gilts are on course to snap a five-day advance, while the pound ended its best run since early August, as investors analyze the economic impact of a budget that delayed tax-raising measures until later this decade. The country’s benchmark FTSE 100 stock index also underperformed peers.
“Reeves’ second budget may have been met with a fairly calm response from markets yesterday, but she still has a lot of work to do if sentiment is to remain positive,” said Jane Foley, head of currency strategy at Rabobank. “The gilts market could worry about the lack of ‘upfront’ tax revenue, since the full impact of the Chancellor’s tax hike measures are not due until 2029/30.”
Reeves was forced to walk a tightrope, needing to raise revenues without adding to inflationary pressures, all while keeping jittery bond investors onside. While markets gave a cautious welcome after she more than doubled a buffer against her fiscal rules, the latest moves signal further gains will rely on economic data and the outlook for interest-rate cuts.
The yield on 10-year debt rose four basis points to 4.46%, after hitting a two-week low on Wednesday. The pound fell from a one-month high, down 0.2% against the dollar to $1.3221, lagging most of its major peers.
That still left both markets up on the week. Traders are now turning their attention to the prospect of a Bank of England rate cut next month.
Money markets are assigning a near 90% chance that the BOE will deliver a quarter-point move in December, and at least one more cut in 2026, given the Chancellor’s measures are forecast to dent economic growth.
One of the UK’s most prominent fiscal think tanks said Reeves has failed to repair Britain’s public finances and looks set to return with “plenty more bracing budgets.” The Resolution Foundation said “the fiscal repair job is far from complete.”
Setareh Salian rifer to What Bloomberg strategists say…
“Gilts have given up some of Wednesday’s exuberance, with some of today’s skepticism possibly stemming from traders questioning how key economic outcomes may vary from assumptions underpinning the government’s numbers. …The UK economy appears to have generally expanded more than forecast over the past few years, meaning the imperative for the Bank of England to cut interest rates on the back of the OBR’s 1.4% growth forecast for 2026 may be missing.”
