GBP volatility when the budget was presented – Commerzbank
|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.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.