Chancellor Reeves’ budget is warmly received by bond markets
Written by
Daily Currency Update
The UK government has announced a major budget package expected to raise roughly £26 billion through frozen income-tax thresholds and increased taxes on pensions, dividends, and property, alongside a new “mansion tax” on high-value homes. To support families and lower-income households, the budget removes the controversial two-child benefit cap, pledges reductions in energy costs, and raises the national living wage. However, the Office for Budget Responsibility (OBR) downgraded its outlook, citing weaker long-term growth and persistently high inflation, highlighting the challenging fiscal environment ahead.
The ECB’s latest Financial Stability Review delivered a firmer warning: large euro-zone banks operating in U.S. dollars need stronger buffers. The ECB cautioned that “capital headroom” may be required to withstand heightened currency volatility and counterparty risk, urging banks to hold sufficient liquid U.S. dollar assets to offset outflows and stabilise funding. The report also reiterated broader concerns around elevated equity valuations, heavy global debt levels, trade tensions, and the rise of stablecoins as potential threats to financial stability.
A new think-tank survey shows banks increasingly expect a shift toward a multipolar global currency system. Many institutions—nearly 60%—want to diversify away from the U.S. dollar, yet the unmatched liquidity of U.S. Treasuries keeps the dollar firmly anchored as the leading reserve asset. As one participant noted: “We are moving from a bipolar to a multipolar reserve system, but the euro is not ready yet to lead.” While recent U.S. policy uncertainty has prompted questions about the dollar’s long-term dominance, the euro and China’s yuan are seen as the main beneficiaries of diversification - though the dollar is still expected to remain the world’s primary reserve currency.
Key Movers
Analysts expect the euro to hold steady or see modest gains in the next few days, supported by growing market expectations that the Federal Reserve may cut interest rates soon a softer dollar tends to benefit the euro. At the same time, stability in the euro‑zone banking system remains under scrutiny after remarks from the European Central Bank (ECB) urging lenders to shore up dollar‑liquidity buffers, which underscores financial‑stability concerns that could weigh on risk sentiment. Finally, with recent data showing the euro‑area economy holding up led by resilient services growth there is cautious optimism that further downside surprises may be avoided, keeping EUR support intact.
Many economists believe the pound will remain underpinned in the short term, after markets responded positively to the budget’s removal of immediate fiscal risk and the improved “headroom” now projected over the medium term. The fact that the budget avoided shock‑level disruption and delivered a credible plan for raising £26 billion gradually has calmed fears about UK government borrowing and boosted confidence among bond and currency markets. That said, the mood is cautious: with economic growth forecasts revised lower and longer‑term structural challenges remaining, sterling may trade in a narrow range unless fresh data on inflation, growth or consumer confidence tips the balance.
With recent U.S. economic data coming in softer including weak retail‑sales growth and a drop in consumer confidence markets have ramped up expectations that the Federal Reserve may cut interest rates soon, which has put pressure on the U.S. dollar. As a result, several analysts now see dollar weakness persisting over the coming weeks unless there’s a surprise inflation uptick or hawkish Fed comments that reverse the trend. However, uncertainty remains if upcoming U.S. data (e.g. inflation or labour‑market prints) shocks to the upside or geopolitical risks increase, the dollar could regain some support as a safe‑haven currency.
Expected Ranges
- GBP/USD: 1.3240 - 1.3290 ▲
- GBP/EUR: 1.1405 - 1.1455 ▲
- GBP/AUD: 2.0285 - 2.0335 ▲
- EUR/USD: 1.1580 - 1.1630 ▲