It’s the UK Budget on Wednesday at 12:30pm GMT, and the Chancellor appears to be making hints that income tax and inheritance taxes could be cut. The options for the former are indexation or partial indexation of income tax thresholds, or a cut to income tax rates, while the latter could be an increase in the threshold before it is levied, a cut in the rate charged, or the abolition of the tax altogether. 

As for stamp duty, the options are multiple. The obvious options are a holiday for stamp duty payments where rates are zero or reduced (but that might only serve to artificially boost house prices), permanent cuts to stamp duty rates, or a realignment of the way it is levied. There is also room for spending increases for the likes of the health service and education, but I suspect the UK government will want to limit its spending to leave plenty available for the Spring Statement and UK election pledges.

However, the UK’s fiscal position continues to look different to the Euroland and US positions. The US has again had to kick the can down the road as far as the debt ceiling is concerned, but once again this has limited the government’s ability to spend on non-essential fiscal items. 

As for Euroland, deficit and debt positions are worsening in a number of the major economies, and the German government was dealt a blow last week when the Constitutional Court ruled that €60billion in untapped credit authorisations can’t be transferred to climate/net-zero based infrastructure projects. That could also mean that €770billion of funds in similar off-budget SPVs (special-purpose vehicle) may have to be dissolved as well. What will a looser UK fiscal position mean for the GBP when the same routes do not appear to be open for Europe or the US?

The next round of central bank meetings is now only a few weeks away, but is there any serious risk of hikes from the BoE (Bank of England), Federal Reserve and ECB (European Central Bank)? I don’t think so, but if there is a risk then the Federal Reserve probably pose the biggest threat to FX markets. I still think the risks of a tightening from the Fed are under 20%, but they are materially higher than the BoE or ECB as these economies appear to be performing worse. 

Some Fed officials continue to push for one additional tightening in interest rates, with core inflation remaining sticky and above the headline rate of consumer price inflation. Moreover, the November US non-farm payrolls could rise far more than October’s reading, given the Auto Union Workers strike had a negative effect in October. With market liquidity expected to deteriorate post the US Thanksgiving Holiday (this Thursday) as we head into the end of the year, the FX markets could become more volatile and less predictable, in my view.

For GBPUSD, the upside risks are still limited ahead of $1.26, in my view, and for EURUSD, a sustained break of $1.0960 is required before I think this is anything other than another reversal of recent risk sentiment.

Last week was a slow week in terms of central bank meetings with only the central bank of the Philippines announcing a policy decision. It decided to leave interest rates on hold. Already this week, the PBOC (People’s Bank of China) decided to leave interest rates on hold, but that was probably because the PBOC had significantly boosted liquidity last week. 

For the remainder of this week, there are a mix of central bank decisions expected. The Hungarian central bank is expected to cut interest rates by 75 basis points, having basically already pre-committed to such a move, taking Hungarian rates to 11.5%, the lowest level since July 2022. Bank Indonesia on the other hand is expected to hold rates at 6%, whilst the Riksbank is expected to raise Swedish official rates 25 basis points to 4.25%. The central bank of Turkey is expected to increase rates by 2.5 percentage points, to 37.5%, a level not seen since the launch of the new Turkish lira in 2005.

Concerns regarding inflation should be receding for most central banks and problems around growth, credit liquidity, and trade should be increasing. For those economies without the fiscal firepower to alleviate problems due to weak global demand, the central banks will have to do a lot more heavy lifting, perhaps at the expense of currency stability.