LONDON: The pound stabilised on Friday after a volatile few sessions, but still headed for its longest stretch of weekly losses in nearly six years, as political and monetary uncertainty has prompted investors to favour the dollar lately.
UK finance minister Rachel Reeves this week delivered her first budget since the Labour party came to power in July - a high-tax, high-spend and high-borrowing set of proposals that unnerved the British bond market and dented sterling.
While the budget created nothing like the havoc of that in September 2022 of former Prime Minister Liz Truss, gilts have sold off, pushing up yields, while traders are betting on fewer UK rate cuts in the coming year as a result too.
Both should in theory support the pound, but the prospect of even tighter British finances and the biggest tax burden in decades created concern about inflation and growth.
“The market sees the heavy spending in the budget as possibly stagflationary, judging from the sharp rise in UK rates,” Saxo Bank analysts said.
Sterling was last up 0.1% at $1.2915, bringing the loss for the week to around 0.4%, set for a fifth consecutive weekly decline, the longest such stretch since December 2018.
Against the euro the pound was up 0.3% at 84.14 pence.
The Office for Budget Responsibility (OBR), the projections of which underpin government budgets, said the economy was set to expand by 2.0% in 2025, up only slightly from a forecast of 1.9% made in March at the time of the previous Conservative government’s last budget, and it trimmed its growth forecasts further out.
The OBR also projected UK inflation will average 2.6% in 2025, up from a previous forecast of 1.5% back in March.
Employers have warned they will struggle to cope with the increase in social security contributions that form the lion’s share of the extra 40 billion pounds that Reeves plans to raise in tax, the biggest increase in a budget since 1993.
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