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The Labour conference opened with Rachel Reeves warning of tough choices. (Chris Dorney / Shutterstock)
UK Chancellor Rachel Reeves gave the strongest indication yet that she would raise taxes to plug the government’s spending deficit at the autumn budget.
Speaking at the Labour party’s annual conference in Liverpool, Reeves again highlighted the “tough choices” the government faced. While effectively ruling out an increase to VAT, she argued that recent history showed she could not ignore the bond market. Almost to emphasise her point, the pound strengthened by half a cent against the US dollar and euro on Monday morning before falling back to parity by the end of the day.
The chancellor will at least be comforted by news that economic growth and business investment were better than expected in the last quarter. This morning’s data revisions saw GDP growth revised up from an annualised 1.2% to 1.4%. Business investment fell in the same period but still increased by 3% on a yearly basis.
The United States also has its own spending decisions to make. Congress must agree a short-term budget by midnight or face another all-too-common government shutdown. Yesterday, the president met with Democrat representatives, who are holding out for more money on healthcare, in an effort to force a deal.
Israeli Prime Minister Benjamin Netanyahu was another that made the journey up Capitol Hill yesterday. He discussed a 21-point plan to end the war in Gaza, part of diplomatic efforts that Republicans believe will soon bear fruit. Trump and Netanyahu urged Hamas to accept the deal or Israel would “finish the job”.
Overnight, the Reserve Bank of Australia decided to keep interest rates unchanged at 4%, as expected. The Aussie dollar strengthened against the pound in yesterday’s session but was little changed immediately after the decision.
A sparse start to the week from an economic point of view ends today with a handful of key eurozone inflation reports. In the afternoon, the latest JOLTs job openings report from the US is sure to impact the US dollar.
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GBP: The perils of policy
The pound moved up, down and back up again yesterday as the Labour conference kicked off. Reeves was at pains to emphasise her fiscal restraint, which certainly helped cool some heads in the bond market. It also demonstrated that sterling’s near-term future will be closely tied with government policy, particularly how that policy is received by markets.
GBP/USD: the past year
EUR: Inflation gauntlet
The euro will be influenced by a number of inflation reads over the next two days. The European Central Bank is currently in a curious position, and with markets struggling to get a read on its thinking, this data should provide a better clue as to where it goes next in regard to interest rates.
GBP/EUR: the past year
USD: More shutdown upheaval
America’s political system is at its most dysfunctional when Republicans and Democrats are forced to work together. Amid the grandstanding, the simple fact is another shutdown would have significant consequences for the economy and the US dollar.
EUR/USD: the past year
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