The bank notes that market positioning in Sterling has turned net short, making the currency more sensitive to any outcome that turns out “better than expected.”
The bar for a positive market reaction is relatively low. Deutsche Bank expects gilt issuance volumes and the deficit path for the coming year to remain close to current forecasts, while fiscal headroom of around £16 billion would likely be seen as broadly acceptable by the market.
A clear and predictable delivery of the budget on these fronts, according to the analysts, should prompt a recovery in the Pound after several weeks of selling driven by political risks.
However, political uncertainty continues to weigh on the currency’s outlook.
Deutsche Bank warns that leadership risks in the months ahead mean that even if the budget is well received, any rebound in the Pound is unlikely to fully erase the built-in risk premium.