Synopsis:

ING highlights the UK’s ongoing fiscal story and its efforts to restore gilt market confidence, but remains bearish on GBP due to looming fiscal consolidation and expected BoE easing. Despite recent sterling stabilization, GBP/USD is expected to drop to 1.19/20, while EUR/GBP is forecast at 0.85 by year-end.

Key Points:

1. UK Government’s Fiscal Strategy:

   • Chancellor Rachel Reeves is pushing a pro-growth narrative to avoid downward revisions from the Office of Budget Responsibility (OBR) ahead of the March budget review.
   • The government may have to announce fiscal consolidation, likely via spending cuts in later years.

2. BoE & Market Stabilization Efforts:

   • The BoE introduced the CNRF, a facility to lend cash to Non-Bank Financial Institutions (NBFIs) during gilt market distress.
   • Unlike the Fed’s Bank Term Funding Program, the BoE’s CNRF is less generous, lending for just one to two weeks and only during a BoE-determined crisis.
   • These measures helped GBP recover 1% from recent lows but may not offer long-term support.

3. Sterling Outlook & BoE Easing Expectations:

   • ING expects a 100bp BoE easing cycle this year, compared to 68bp currently priced in by markets.
   • March fiscal tightening and weaker services inflation in Q2 should reinforce GBP downside risks.

Conclusion:

Despite near-term GBP stabilization, ING remains bearish on sterling, seeing GBP/USD falling to 1.19/20 and EUR/GBP rising to 0.85 by year-end. BoE rate cuts and fiscal consolidation should pressure GBP, keeping it vulnerable in 2025.