GBP/USD: Conditions in gilt market improving but risks still to downside for the pound – MUFG

The gilt market in the UK has continued to rally following the government’s plans to tighten fiscal policy at the start of this week. Nonetheless, the pound is unlikely to stage a sustained rebound, economists at MUFG Bank report.

Tighter fiscal policy will be less supportive for growth

“We still believe that the pound is vulnerable to further weakness now that the gilt market is becoming more stable again.”

“Tighter fiscal policy will be less supportive for growth with the UK economy already facing a high risk of falling into recession, and while financing conditions are improving they are likely to remain tighter than pre-mini budget.” 

“There is now less pressure as well on the Bank of England to raise rates as much as priced into the UK rate market (>5.00%) which will lead to some disappointment and pound weakness.”