GBP: A test of credibility
◆ High interest rates have supported the GBP over recent years, but favourable interest rate differentials may not be sufficient if there is growing market concern about the UK’s fiscal situation.
◆ The Autumn Budget on 26 November could serve as a credibility test for the GBP. The UK government faces a fiscal gap to fill, with estimates (excluding any headroom) ranging from GBP20bn to 40bn (Bloomberg, 3 September 2025). With little space to manoeuvre, political uncertainty fattens the GBP’s tail risks.
◆ Nevertheless, the USD has also struggled throughout this year due to tariff and fiscal policy concerns. More recently, uncertainty hangs over Fed independence. The rate differential should prove an important source of support for GBP-USD. With a likely pause by the Bank of England (BoE), we think GBP-USD will move towards 1.37 by yearend. UK domestic risks could be reflected in GBP-EUR, instead.
AUD: Upside awaiting
◆ FX hedge ratio on Australian investors’ foreign equity holdings could go higher, which is also AUD-positive.
◆ We see the AUD being supported both near term and medium term, for several reasons.
◆ Externally, there is renewed downward pressure on the broad USD with a weakening labour market, rising Fed easing expectations, and independence concerns. If global equity performance continues to be underpinned by monetary and fiscal support, the AUD will likely strengthen.
◆ Domestically, positive data momentum, which reinforces a slow rate cut trajectory for the Reserve Bank of Australia (RBA), is likely to support AUD-USD via the rate differential channel. The transmission of RBA easing to the economy will likely be expedited by the high share of variable rate mortgages, and consumer spending has staged a decent recovery so far. Should growth risks re-emerge in Australia, there will be ample fiscal capacity, providing support for the AUD.
as of 9-30-2025
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