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. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD keeps its daily gains below 1.0900 post-US PCE
The bearish sentiment in the US Dollar remains unabated and supports EUR/USD's constructive outlook, keeping it in the upper-1.10800s after the release of U.S. inflation data, as measured by the PCE, on Thursday.
USD/JPY trims losses and approaches 153.00
Following an earlier decline below 152.00, USD/JPY now manages to regain some composure and advance to the vicinity of the 153.00 barrier. The initial strong bullish move in the Japanese Yen came after BoJ's Ueda left the door open to a potential rate hike in December at the bank's meeting early onThursday.
Gold corrects lower to $2,770 following US inflation prints
Gold remains on the back foot near $2,770 per troy ounce, as US inflation data ticked lower in September, while US yields display a negative performance across the curve.
Eurozone inflation up to 2% in October as unemployment hits new record low
The Eurozone’s inflation rate increased more than expected, with core inflation stable at 2.7%. The direction of incoming data in the region is not quite clear, which provides the ECB with confusing signals for the path of rate cuts.
Bank of Japan holds rates steady amid signs of modest GDP growth
Monthly industrial production results have been mixed but generally indicate a modest recovery in third-quarter GDP. Clear guidance from the Bank of Japan remains elusive, with each upcoming meeting being pivotal.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.