City dumps the pound ahead of Reeves’s Spring Statement

Money managers are dumping the pound before Rachel Reeves’s Spring Statement as the City braces for growth downgrades and £15bn of public spending cuts.

Net sales of the pound by institutional investors, such as asset managers and mutual funds, have been four times higher than the average in recent weeks, according to Bank of America.

Professional investors are selling sterling ahead of an expected downgrade in growth forecasts from the Office for Budget Responsibility (OBR).

The spending watchdog is expected to present forecasts showing growth for this year has been downgraded from 2pc to about 1pc.

On Tuesday Credit ratings agency S&P Global cut its forecast for UK growth this year from 1.5pc to 0.8pc.

Its economists said: “High prices and weak growth suggest the economy has lost some capacity to grow following recent shocks, namely, the Covid-19 pandemic, Brexit, and the energy crisis.

“At the same time, businesses and households across the UK are adjusting to changes in public policy.”

Weak growth has left the Chancellor at risk of breaking her self-imposed fiscal rules. She is expected to announce £15bn of cuts to public spending on Wednesday in an effort to rebalance her October Budget.

Heavy cuts are necessary after a surge in government borrowing costs at the start of the year, which has wiped out the £9.9bn of fiscal headroom Ms Reeves left herself in her Budget.

Kamal Sharma, the Bank of America’s strategist, suggested that Ms Reeves’s fiscal rules had been a weight on sterling.

He said: “What struck us about the UK was its relative vulnerability versus the peer group due its nominal fiscal anchor – the fiscal rule which is a gravity-pull for markets.”

Bank of America analysts said markets were “likely under-pricing” the risks of sharp movements in the pound as a result of Ms Reeves’s Spring Statement. Mr Sharma said Bank of America was “concerned by the complacency” shown in the market in the run up to the Spring Statement.

Despite heavy selling from institutional investors, the pound has climbed more than 6pc against the dollar since mid-January. The rally has been driven by US currency weakness, rather than sterling strength, as Donald Trump pushes ahead with his tariff policies.

Sterling has slipped about 1pc against the euro since the turn of the year as Europe has been buoyed by Germany’s plans to loosen its public finances for defence spending and create a €500bn (£420bn) infrastructure spending fund.

Institutional investors are just one part of the market for sterling. Other buyers and sellers include retail investors, banks and businesses that need the currency for cross-border trade.