Traders have ramped up their bets against the pound towards levels last seen in the Liz Truss mini-Budget crisis of 2022.
In an ominous sign for Rachel Reeves, speculators have resumed betting on a fall in sterling’s value ahead of the Chancellor’s Budget in November, when she is set to sanction more tax rises to fill a hole in the public finances of up to £50 billion a year.
Latest data from the Commodity Futures Trading Commission shows there were up over 33,000 net bets out against sterling worth £2 billion, reversing this year’s positive trend.
The US regulator tracks how traders are positioned in what are known as futures contracts.
‘Negative bets on sterling indicate that speculators are betting that the UK’s fiscal woes will be the dominant factor for the pound in the months ahead,’ said Jane Foley, head of foreign exchange strategy at investment bank Rabobank.
The number of ‘sell’ contracts out against the pound is well shy of the 80,000 peak hit three years ago, shortly before the mini-Budget of unfunded tax cuts spooked markets and saw sterling slump to its lowest against the dollar in nearly four decades, but it is increasing.
On the back foot: In an ominous sign for Rachel Reeves, speculators have resumed betting on a fall in sterling’s value ahead of the Chancellor’s Budget
Sterling has since recovered, helped by higher-for-longer interest rates as the Bank of England tries to curb the country’s stubbornly high inflation.
But renewed ‘jitters’ on the bond market, where the cost of long-term Government borrowing reached a 27-year high last week, could have ‘a significant currency impact in the UK’, according to Foley.
That is because Britain relies on what the former Bank of England Governor Mark Carney called ‘the kindness of strangers’ – the willingness of foreign savers to fund the gap between what the Government spends and what it raises in taxes – known as the deficit.
‘If they decide to repatriate away from gilts,’ Foley said of UK Government bonds or IOUs, ‘both gilt prices and the pound are vulnerable.’
Reeves (pictured) is under growing pressure to come up with a package of tax rises and public spending cuts to appease both the financial markets and her own backbenchers, who recently blocked her moves to cut disability benefits.
The Chancellor has ruled out increasing the biggest revenue earners – income tax, VAT and corporation tax – leaving wealth taxes on property, pensions and inheritances firmly in her sights.
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But after hammering business with a £25 billion raid on employers’ National Insurance Contributions last year, calls are growing for her to make deeper spending cuts to balance the books.
‘Put simply, the Government has pushed through nearly nine times more in taxation hikes than spending cuts,’ said Sanjay Raja, UK economist at Deutsche Bank.
He also warned that relying on more tax increases would push headline inflation higher as businesses passed on increased costs to consumers.
Raja also reckons that Reeves’ historically low ‘fiscal headroom’ – or buffer – of £10 billion should be nearer £30 billion to reassure financial markets. He said: ‘Any efforts to raise the fiscal headroom from current levels would go a long way in supporting gilt market sentiment.’
Sterling has held up well in the past year, despite five interest rate cuts from the Bank of England, which in theory make the currency less attractive to hold.
‘We are not at crisis point yet,’ said John Wyn-Evans, head of market analysis at wealth manager Rathbones.
But he warned that the bond market had made it clear to Reeves that the country’s finances are ‘on thin ice’ and she had ‘one chance to stop the rot’ in her Budget on November 26. ‘It should be clear to all by now that piling higher taxes on to workers and businesses is ultimately counterproductive,’ Wyn-Evans said.
‘The Government has already attempted to make spending cuts, including on welfare, but these were opposed by its own backbenchers.
‘Perhaps if they are better thought through this time, there is a chance that they will stick, especially if MPs can read the signals from markets,’ Wyn- Evans added.
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