GBP volatility when the budget was presented – Commerzbank

Source Fxstreet

Yesterday, when the British Chancellor of the Exchequer, Rachel Reeves, delivered her budget speech, there was visibly a lot of volatility in the gilt market, the market for British government bonds, and in the foreign exchange market in GBP rates. No wonder. Everyone still remembers that in 2022, the then Tory government under Liz Truss triggered a rather spectacular collapse in the gilt market with its budget plan, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

Every budget is a balancing act

“The events of that time may be a cautionary reminder that even governments can only manage their finances under the restriction of a budget constraint. In other words, for finance ministers, too, there is no free lunch. No matter how many supporters of ‘modern monetary theory’ may claim the opposite. But it's just not that easy with the government budget constraint.”

“Because a rapidly growing economy generates more tax revenue for the treasury, a budget policy that chokes off growth by saving too much is not always the best way to achieve fiscal stability. In theory, a finance minister can even save her way into national bankruptcy. Therefore, every budget is a balancing act.”

“The fact that the British government is relying on tax increases in its budget rather than excessively cutting spending is probably the right decision from the point of view of fiscal stability. But this will only become clear later. Until then, it depends on the gilt traders' opinions. But because every trader knows that it is not their opinion that matters, but the average opinion of all the others, it sometimes takes a little back and forth in prices until an equilibrium is found and every trader believes that all the other traders will be satisfied. In the GBP and Gilt markets alike. That is market mechanics and not a warning from the market to Chancellor Reeves.”

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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