Synopsis:

Credit Agricole highlights that renewed political and fiscal risks are weighing heavily on the GBP, with echoes of the traumatic September 2022 gilt crisis continuing to shape investor sentiment. Uncertainty over UK Chancellor Rachel Reeves’ future and the Government’s fiscal credibility is keeping GBP vulnerable.

Key Points:

• Fiscal Austerity and Policy U-Turns:
  • Investors remain concerned about the growth-negative impact of last year’s fiscal austerity measures, which took effect in April.
  • A backbencher rebellion forced PM Starmer’s Government to water down a welfare reform bill, sacrificing GBP 5bn in planned savings and calling into question Labour’s pledge to avoid tax hikes.

• Political Drama Adds to FX Nerves:
  • Chancellor Reeves appeared visibly distraught in Parliament as PM Starmer failed to openly back her, triggering speculation about her future and renewed selling of gilts and GBP.
  • Markets worry that Reeves’ potential departure would damage fiscal credibility, a reminder of the September 2022 mini-budget chaos.

• Data Focus – But Politics Front and Centre:
  • Final UK PMIs for June will be watched for signs that the worst of the recent slowdown is over.
  • However, Credit Agricole warns that better data alone may not be enough: FX investors will demand clarity on the Government’s fiscal policy and leadership.

• Lingering Gilt Market Trauma:
  • Memories of the 2022 gilt market meltdown and GBP crash continue to shape sentiment, leaving GBP exposed to any renewed questions about fiscal discipline.

Conclusion:

Credit Agricole believes GBP remains under political and fiscal pressure, with investors sensitive to any sign that the UK’s fiscal credibility could unravel again. Until Chancellor Reeves’ position and the Government’s policy path are clarified, GBP consolidation will remain elusive, with the haunting memory of the 2022 gilt crisis casting a long shadow over the currency’s near-term outlook.