The UK published on Friday data showing a net public sector surplus of £15.4bn in January, which fell short of the £20bn estimated by the Office for Budget Responsibility in October alongside the Budget.
That further raises the probability that Chancellor Rachel Reeves will need to scale back spending if she wants to avoid hiking taxes in her Spring Statement on 26 March. Remember that the fiscal headroom originally expected last autumn has been eroded by the rise in gilt yields.
We think sterling is going to suffer from the March Budget event, also as the Bank of England could see lower spending as a reason to unlock more cuts in line with the recent dovish shift in the MPC. While sterling is not as directly exposed to US tariffs as the euro, we expect the impact of upcoming broad-based US protectionist measures to weigh on all European currencies vis-à-vis the dollar. We expect a return below 1.25 in GBP/USD in March.
This week, the UK data calendar is empty, so all the domestic focus will be on BoE speakers. We’ll hear from two doves today – Swati Dhingra and Dave Ramsden – as well as from hawkish-leaning Clare Lombardelli. Tomorrow, we'll hear from Chief Economist Huw Pill
