John Healey. Picture by Lauren Hurley / No 10 Downing Street.
Budget costs are stacking up with new energy price support pledge.
Weakness against euro is contained and orderly, but pressures against the dollar are more intense.
Pound Sterling Live predicts the pound will struggle into the budget but should recover in its wake.
The British pound fell to its lowest level in months against both the euro and dollar this week and further losses are possible.
Elevated energy prices and global borrowing costs are of concern, but it's the domestic agenda where risks are building as we note fresh headlines detailing planned giveaways at next month's budget.
On Friday we hear ministers are drawing up plans for targeted help with energy bills for poorer households in next month’s budget.
Pound Sterling Live has warned previously that giving energy bill support would be a temptation Prime Minister Burnham and Chancellor Healey would fall for, a giveaway that will require corresponding tax rises just to keep the fiscal balance unchanged.
With budget headroom having been eviscerated by rising borrowing costs, there's a real risk that the plans fail the credibility test and UK gilts and the pound become the expression for investor discontent.
Pound Sterling Hits Lowest Levels in Months
Energy price rises are set to add hundreds of pounds to annual gas and electricity bills in January, taking them to levels last seen in 2023.
The average bill is set to rise to more than £2,000 a year.
Government sources, as reported by The Times, said Healey wanted to use his first budget to take a "hands on" approach to the crisis.
Sterling looks uneasy: the pound-to-euro exchange rate traded at 1.1618 on Thursday, a level last seen on July 26. For now losses are contained, but there's a risk they extend as nerves concerning the Budget build.
The pound-to-dollar trades at 1.3222, a level last seen exactly two months ago. This is exchange rate is particularly weak owing to the broader rally in the dollar.
Above: UK wholesale gas for November delivery.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Spending Wishes Stack Up
Talk of energy bill support comes just days after headlines about the government's desire to lower taxes, and numerous other measures designed to provide consumers with "breathing space".
Specifically, Burnham floated an aspiration to raise the stagnant personal tax allowance from £12,570 to £15,570.
Other giveaways include a £9BN Housing Fund, a regional and council housing funding package to boost social housebuilding.
Remember Liz Truss' Energy Support?
Liz Truss is an important contextual reminder of how costly energy support measures are and how they can quickly test the market's appetite for spending profligacy.
Ten days ago I wrote, "Burnham Must Avoid the Temptation to Offer Energy Bill Support".
The context I alluded to was The Energy Price Guarantee which was announced by the Truss government on 8 September 2022, capping the typical annual dual fuel bill at £2,500 for two years, with an equivalent scheme for business alongside it.
The cost to the government ran into tens of billions, and is why the markets were already very vulnerable when her Chancellor Kwasi Kwarteng dropped his 'mini budget' clanger days later.
The rest is history, and so too will Burnham if he misjudges the market with another large giveaway.
Keep in mind, bond yields - signifying the cost of government borrowing - are much higher today than they were in 2022.
On Monday Pound Sterling Live made another Truss cross-check when it covered news Burnham is considering slashing taxes for all workers and business owners, while the ONS reported the government borrowed more than was expected in August.
Why the Pound Can Still Recover into Year-end
Pound Sterling Live's House View is that the pound would be vulnerable to weakness in the run-up to the budget but that it would recover in the weeks that follow, as Burnham won't test financial markets.
With Truss' short-lived premiership in mind, the Prime Minister is well aware of what's at stake when you overcommit to tax cuts and spending giveaways.
It's why we think Burnham will tinker around the edges and give small giveaways to some households that don't materially change the arithmetic for both the recipient households and the government's finances.
What's important for Burnham is that they generate friendly headlines.
Talk of an election in 2027 means he would be wise to adopt this shallow strategy.
If this is the strategy that is chosen, the pound can quickly recover its pre-election blues and focus will return to the UK's resilient economy and elevated bond yields, two elements that can provide support into year-end.
Downside risks are elevated, though, as these headlines are concerning and raise the odds of a mistake.
