Autumn Budget Updates Place the GBP/USD under the Spotlight

On Thursday, the Bank of England warned that the UK is facing its lengthiest recession since records began after raising interest rates to 3%.

Following the single largest rate hike in 33 years, Bank of England Chief Economist Huw Pill spoke on Friday, saying,

“Our target is ultimately not on the real economy. Our target necessarily, because we’re running monetary policy, is to contain inflation.”

Pill added,

“The slowdown in the economy is what we anticipate is required to contain domestic inflationary pressures to achieve our targets.”

Chief Economist Huw Pill’s comments suggest that there may be more to come from the Bank of England. In considering the likelihood of more rate hikes, the markets can expect the UK economy to contract by more than five consecutive quarters.

Reportedly, the Bank of England forecasts the UK economy to contract in five out of six quarters should the Bank stand pat on borrowing costs.

Last week’s doom and gloom warning put the UK Government and the Autumn Budget under the spotlight.

Chancellor Jeremy Hunt and PM Rishi Sunak in the Spotlight

Over the weekend, updates from the UK government’s Autumn budget plans made their way through the media outlets.

Following the failed Kwarteng and Liz Truss budget, news hit the wires of the UK Government planning to cut spending and increase tax revenues by £60 billion.

According to the Guardian, Jeremy Hunt plans to cut spending by £35 billion and to increase tax revenues by £25 billion.

Ministers are reportedly due to submit the salient points of the Autumn Budget to the Office for Budget Responsibility (OBR) today. The plans to cut spending and raise taxes come at a difficult time considering the Bank of England’s economic outlook.

One area of contention remains Prime Minister Rishi Sunak’s pledge to deliver on the Tory Party’s 2019 manifesto. The Government will need to decide whether to raise benefits in line with inflation and to change the pensions triple lock.

For the GBP/USD, the UK Government has managed market expectations. Jeremy Hunt warned of tough decisions on spending and taxes ahead of the November 17 Autumn budget.

The Government’s Autumn Budget will need a broader Tory Party’s seal of approval. Sunak and the Pound will also need voters, the global financial markets, and the rating agencies to approve.

In October, Moody’s changed the outlook on the UK to negative while affirming the Aa3 rating.

Moody’s highlighted the reasons for the change in outlook as,

• Heightened unpredictability in policymaking amid weaker growth prospects and high inflation.
• Risks to the UK’s debt affordability from likely higher borrowing and risk of a sustained weakening in policy credibility.

The GBP/USD will reflect how the markets perceive the Autumn Budget. However, the electoral polls will need to improve to ease calls for a General Election. Sunak will also need to end in-Party fighting.

According to the latest (November 1-2) YouGov voting intention survey, the Conservative Party would garner 24% of the vote versus 50% in favor of the Labour Party. Compared to the previous poll, there was a one percentage point swing in favor of the Blues. The polls continue to incentivize Labour to push for an early General Election.

At the time of writing, the GBP/USD was down 0.42% to $1.13309, with recession fears and the Autumn Budget headwinds.