Pound Under Pressure as Markets Shift Focus to November Budget

The British pound is facing growing headwinds, with analysts at Bank of America (BofA) warning that the currency is trading in a highly asymmetric environment dominated by fiscal concerns rather than traditional macroeconomic indicators.

Budget Overshadows Economic Data

BofA highlighted that despite three major U.K. economic data releases last week, markets assigned “very little value” to these numbers. Normally, such releases would guide sterling, but the upcoming November Budget is now seen as the decisive factor for traders. This unusual dynamic has broken the “usual norms” for GBP, leaving fiscal policy as the main driver of sentiment.

Fiscal Concerns Weigh on Sterling

Recent developments underscore these worries. The pound has fallen even as U.K. economic data surprised to the upside, with BofA pointing to a troubling negative correlation between GBP and 10-year gilt yields. Both gilts and sterling have been sold off simultaneously, signaling investor unease over the country’s fiscal position.

Public sector net borrowing in August hit £18.0 billion, the highest in five years and £5.5 billion above the Office for Budget Responsibility’s forecast. Cumulative borrowing has reached £83.8 billion, overshooting projections by £11.4 billion. Analysts warn that fiscal headroom could shrink by £20-30 billion this autumn due to policy reversals, higher yields, and productivity downgrades, likely forcing fiscal consolidation.

Trading Implications and Outlook

While BofA expects the pound to stay under pressure until after the Budget, they project some recovery once event risk fades. Structural strengths, including the U.K.’s service/manufacturing balance, could help cushion tariff disruptions and support growth estimates.

For traders, BofA sees current EUR/GBP levels as attractive for positioning, particularly in longer-dated options. However, they advise caution, recommending selling GBP on rallies rather than betting on a sustained recovery before fiscal clarity emerges.