Pound Sterling Rally May Fade on UK Fiscal Concerns, Citi Says

The British pound may see a brief rally following the Bank of England's upcoming policy meeting, but any gains are likely to be short-lived as significant fiscal risks loom ahead of the UK's October budget, according to analysts at Citi.

Bank of England Offers Temporary Support

Citi's economics team anticipates the Bank of England (BoE) will hold interest rates steady in a 6-3 vote at its Thursday meeting. The note suggests that a "hawkish hold"—where the central bank keeps rates unchanged but signals a readiness to hike in the future—could provide marginal support for sterling.

With markets currently pricing in only 5 basis points of rate increases, such a stance from the BoE could keep UK rates attractive to foreign investors, potentially leading to near-term strength for the pound.

October Budget Looms as Key Risk

However, the investment bank warned that market focus will quickly pivot from monetary policy to the UK's fiscal outlook. The government's budget, scheduled for October 28, is seen as a major source of potential downside for the currency.

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Citi highlighted several key concerns for investors ahead of the budget announcement:

• Recent weakness in the UK government bond (gilt) market during the budget reference period may have reduced the government's fiscal headroom.
• Uncertainty surrounding future government spending commitments could keep investors cautious through October.

Investor Positioning

In light of these impending risks, Citi advised that any strength in the pound over the coming days and weeks could present a strategic opportunity. The firm stated it favors using a near-term rally in GBP to begin positioning for potential downside as attention inevitably shifts to the October budget.