Headlines
• Sterling rallies on Autumn budget –
UK GDP forecasts rise.
• Osborne scraps tax credit cuts
– Pound supported.
• GBP/EUR rallies on ECB easing leak –
Policymakers discuss potential new stimulus.
• ‘Cable’ up on sturdy growth projections –
But strong US data supports December rate hike.
Sterling
The Pound rebounded yesterday was after a bad start to the week as investors reacted positively to British Chancellor George Osborne’s Autumn Statement.
Analysts were cheered by Osborne’s U-turn on tax credit cuts for low-earning households, which politicians from both sides of the coin had feared would have a negative impact on living standards and stymie the economic recovery. The Chancellor announced huge cuts to government departments for transport (37%), environment (15%) and energy (22%) but protected funding for police, health, education, international aid and defence.
Overall, the latest budget was much more positive than some analysts had anticipated, with Osborne taking advantage of revisions to the Office for Budget Responsibility’s income tax and national insurance contributions to announce fresh spending measures whilst still aiming to reduce the deficit this year.
The Pound rallied following the statement, which featured upgraded GDP forecasts of 2.4% for 2016 (up from 2.3%) and 2.5% for 2017 (up from 2.4%) but still projected a budget surplus of £10.1 billion by the 2019⁄2020 financial year.
Euro
Sterling appreciated by around 80 pips against the Euro yesterday in reaction to the surprising new UK budget.
Tory Chancellor George Osborne announced new infrastructure, transport and culture spending, funded by new stamp duty charges, a levy on apprenticeships and cuts to the welfare bill. Markets were wrong-footed by the Autumn Statement because although there were fierce cuts, they were less pronounced than many had anticipated. The fact that growth is tipped to remain close to 2.5% over the next few years, even as the deficit decreases, was seen as a positive signal for Sterling traders.
GBP/EUR was also boosted by a leak from anonymous officials at the European Central Bank confirming that at December’s meeting policymakers are considering cutting interest rates – possibly with a split-level deposit rate meaning that banks depositing large amounts of cash at the ECB would incur larger fees – and widening the remit of the bank’s current €60 billion a month quantitative easing scheme to include riskier assets.
US Dollar
The Pound to US Dollar exchange rate rallied by around a quarter of a cent yesterday as markets breathed a sigh of relief following the British Autumn Statement, which was not seen as being a significant threat to UK GDP growth over the next few years.
Sterling’s gains were cut short by a couple of decent US ecostats, which further solidified the case for the first Federal Reserve interest rate hike in nine years to take place in December. The US durable goods index, which measures volumes of sales of expensive long-lasting goods and is seen as a broad measure of consumer confidence, smashed expectations of 1.7% with a 3.0% expansion and the US service sector PMI rose from 54.8 to 56.5, beating forecasts of 55.1.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rose by around 40 pips yesterday as sentiment towards Sterling increased following the Autumn Statement, which was not seen to weigh on Bank of England rate hike expectations. Subsequently analysts now predict that the BoE will begin its tightening cycle in the second quarter of next year, provided the Fed does in fact begin its own hiking cycle next month.
Crude prices steadied yesterday as data showed a smaller-than-anticipated buildup in US oil inventories but this did not lead to an appreciation of the commodity-sensitive ‘Loonie’ against Sterling.
Australian Dollar
The Pound rebounded from a disastrous -250 pip depreciation against the Australian Dollar on Tuesday with a near-100 pip rally during the London session yesterday. The majority of Sterling’s gains came as traders pushed forward their BoE rate hike bets in response to the government’s upgrade to its UK GDP projections.
New Zealand Dollar
Sterling rallied by around a quarter of a cent against the New Zealand Dollar yesterday, on news that statisticians expect British economic output to improve over the next few years despite cuts to government spending and welfare. But demand for the ‘Kiwi’ was stoked by a rise in futures markets suggestive of a near-term pickup in dairy prices.
Data Released Today
12:00 EUR German GfK Consumer Confidence Survey (DEC) Medium 9.2