11 November 2025: Tax Pledges and the two-child cap will be the focus of the budget

The Chancellor continues to provide ever more hints to the nation about the contents of her budget, which is due to be delivered in a little over two weeks.

Tax increases look like a foregone conclusion, but she has sweetened the pill by proving her strongest indication yet that the two-child cap on benefits will be removed.

The effect of breaking her pledge not to raise income tax, VAT or national insurance for ordinary working people could be devastating for the Government since they have barely been able even to scratch the surface of the other manifesto pledges concerning illegal immigration, NHS waiting lists and criminal justice reform, while the fiascos over mistakes having been made in wrongly releasing prisoners from prison smacks of simple incompetence.

Rachel Reeves blamed poor productivity and growth over the last few years on the previous government "always taking the easy option to cut investment in rail and road projects, in energy projects and digital infrastructure". She promised during the election campaign to "bring stability back to our economy".

"What I can promise now is I will always do what I think is right for our country, not the easy choice, but the thing that I think is necessary," she added.

The chancellor blamed the UK's lack of growth under her tenure on global conflicts, trade, and tariffs.

In a dig at Donald Trump, who has imposed wide-ranging tariffs on countries around the world, she said: "I don't think anyone could have foreseen when this government was elected last year that we were going to see these significant increases in global tariffs and barriers to trade. Trump was speaking about “tariffs being his favourite word long before he was elected, yet there were no concerns raised by Reeves before.

"And I have to be chancellor in the world, as it is not necessarily the world as I would like it to be. But I have to respond to those challenges, and that's the responsible thing to do."

The latest employment data will be released this morning. Likely, wage growth will remain above the rate of inflation, even though it has continued to slow, while unemployment will stay close to 4.4% in September’s data.

Bank of England Monetary Policy Committee Member Claire Lombardelli spoke yesterday about her belief that, since interest rates remain close to neutral, it is not surprising that the votes on any rate cuts remain near. It is interesting to note that two of the committee's permanent members, Sarah Breedon and Dave Ramsden, have become frequent supporters of rate cuts.

The Pound traded in a tight range yesterday, with Sterling holding steady amid renewed optimism that the ongoing US government shutdown could soon be resolved. It reached a high of 1.3191 and closed at 1.3181.

The Senate yesterday approved a funding package expected to bring to a close the longest government shutdown in US history, after a coalition of Democrats broke ranks and voted with Republicans. The move has enraged many in their Party.

The vote passed 60-40, with seven Democrats and one independent joining Republicans to approve a compromise that would fund most federal agencies through January. The agreement, which next goes to the House of Representatives, does not directly address the expiring tax credits for healthcare premiums, the issue at the centre of the 40-day stalemate between Democrats and Republicans. However, the Senate majority leader, John Thune, has promised a Senate vote later this year on the subsidies.

President Trump has already expressed support for the deal, and Speaker Mike Johnson has urged members of the House, which has been on an extended recess since the shutdown began, to return in preparation for a vote and a swift delivery to the president’s desk.

Democrats have been fighting for a permanent extension of subsidies that support Americans who rely on the Affordable Care Act, which are scheduled to expire at the end of the year. Without an extension of the tax credits, millions of Americans could see sharp rises in their healthcare premiums or lose their marketplace coverage entirely.

While Jerome Powell has likened assessing the US economy’s health without data to driving through fog, it may be slightly premature to dive back in while the mist is just beginning to clear. It will be interesting to find out whether the Bureau of Statistics plans to release an interim report on employment or whether it intends to produce a“jumbo” report on December 5th, when the original November data was due to be published.

Either way, the markets will be almost salivating in the days leading up to its release.

FOMC members who have supported two interest rate cuts this year signalled on Monday divergent views on the need for more, underscoring the challenge for Federal Reserve Chair Jerome Powell as he helms a divided group of policymakers.

St. Louis Fed President Alberto Musalem was downright sceptical about the prospect of further monetary easing. "We must tread with caution here. I think there is limited room to ease policy further without policy becoming overly accommodative," he told Bloomberg Television.

Meanwhile, San Francisco Fed President Mary Daly said she is on the alert for the possibility that a rise in productivity from the adoption of artificial intelligence could allow for faster economic growth without pressuring inflation.

"While I'm looking for productivity gains and seeing if they're going to continue, I'm also keeping my eye completely focused on inflation to make sure that it doesn't pick up in a way that would suggest we need to do more or we need to hold longer,"

At the same time, she said, "We don't want to make the mistake of holding on too long for rates, only to find out we injured the economy."

Monthly job growth has fallen from around 150,000 per month in 2024 to around 50,000 in the first half of 2025.

Finally, Fed Governor Stephen Miran, who dissented in October in favour of a bigger rate cut, feels the evidence is already in, with quickly falling inflation and a softening labour market making further policy easing "imperative." He repeated yesterday his call for a half-percentage-point cut at the policy-setting Committee's December 10 meeting.

"I would think the reasonable thing to be is incrementally more dovish than we were in the September FOMC, which again indicated three cuts," Miran said in an interview with CNBC, referring to the median Fed policymaker view at that time that three quarter-percentage-point rate cuts would be appropriate by the end of 2025. The Fed has delivered two so far.

Financial markets are currently pricing about a 63% chance of a quarter-percentage-point rate cut in December, versus about a 37% probability of a pause in the rate cuts.

The dollar index closed barely changed at 99.63 yesterday, after trading between 99.74 and 99.46.

Later this morning, the ZEW Institute will publish its latest review of economic sentiment in both Germany and the wider Eurozone. In October, the indicator of Economic Sentiment for Germany rose two points to 39.3 in October 2025, its highest level since July’s three-year peak of 52.7, but falling short of market expectations of 40.5.

Hopes for a medium-term recovery remain. Despite the uncertainty surrounding the implementation of the government investment program and ongoing global uncertainties, the ZEW Index increased slightly in October."

Meanwhile, investors are optimistic about a more significant increase in the index across the region, buoyed by France’s unexpected Q3 GDP rise.

As the end of 2025 approaches, the apparent slowdown in inflation in the Eurozone provides the relief investors have been awaiting. However, while prices are nearing the 2% target, growth remains fragile, undermined by political turmoil and persistent international tensions.

Christine Lagarde, President of the ECB, has expressed caution, opting to keep interest rates unchanged and preparing the markets for a prolonged status quo, with the deposit rate remaining stable at 2%.

While some analysts highlight the influence of external factors in this trend, the ECB is opting to bide its time, thereby maintaining a level of visibility reassuring to market participants and leaving the door open to adjustments if the economic recovery weakens.

While disinflation provides a calmer monetary environment, growth is still hindered by political uncertainties within the eurozone and beyond. Geopolitical tensions continue in the background, as does the volatility associated with US trade policy and the risks of tariff increases.

The ECB, though more optimistic for 2026 and 2027, possibly anticipating growth of 1.3% and 1.8% in its next revision, reminds us that the balance remains fragile between stimulus and austerity.

The differing pace of European monetary policy and the Fed's also raises questions about the euro's medium-term competitiveness, making growth projections challenging despite reassuring economic signals. Economic stakeholders thus exhibit marked caution, aware that the political dynamics remain subject to internal and external uncertainties. At the same time, volatility in long-term interest rates sustains uncertainty over bond portfolios and future allocation decisions.

The market will gradually wean itself off a reliance on monetary policy as the G7 rate-cutting cycle comes to an end and become more reliant on growth expectations. That will likely favour more dollar strength.

Yesterday, the Euro also traded in a narrow range between 1.1583 and 1.1541, closing at 1.15564

Have a great day!