Pound US Dollar Slips Following UK Autumn Budget

Pound US Dollar (GBP/USD) Exchange Rate Dips as UK Budget Announced

The Pound US Dollar (GBP/USD) exchange rate tumbled on Wednesday morning before Sterling pared some of its losses in the aftermath of the Budget announcement and was down around 0.2% on the day’s opening level to trade at 1.3735.

Pound (GBP) Weakens as UK Spending Plans and Growth Forecasts Announced

The Pound (GBP) has slipped today as investors process the UK’s Autumn Budget.

After already revealing some of the government’s spending plans in the press, Chancellor Rishi Sunak pledged to create a new post-Covid economy and said the UK is entering an economic ‘age of optimism’.

Sunak told the cabinet on Wednesday that the Budget ‘will deliver a stronger economy for the British people’, with ‘levelling-up’ a ‘golden thread’ running through his speech.

The response to the Budget appeared mixed, with a £150bn spending increase over this Parliament announced as well as tax cuts.

Part of the spending plans were driven by improved economic growth forecasts from the Office for Budget Responsibility (OBR) that expect the economy to reach pre-crisis levels at the turn of the year.

Upwardly revised forecasts point to 6.5% growth this year, up from 4% expected in March, and 6% growth next year, downwardly revised from 7.3% in the previous forecast.

However, the OBR’s forecasts of a 4% drop in productivity as a result of Brexit remains on course due to a 15% drop in trade between the UK and EU.

The OBR said:

“The evidence so far suggests that both import and export intensity have been reduced by Brexit, with developments still consistent with our initial assumption of a 15 per cent reduction in each”.

The OBR also warned that inflation could rise above its 4.4% forecast, and could peak at 5% next year.

Against a backdrop of soaring inflation, supply chain problems, and staff shortages impacting the UK economy, some investors still see UK suffering longer-lasting economic damage.

US Dollar (USD) Mixed on Durable Goods Orders Drop

The US Dollar (USD) has been mixed today, amid cautious market trade, and following better-than-expected US durable goods orders data, although the reading contracted for the first time in five months.

New durable goods orders fell -0.4% in September, a drop on August’s downwardly revised 1.3% growth, but beat forecasts of a -1.1% contraction.

The fall in orders fuelled concerns over fourth quarter US growth, which weighed on the US Dollar as USD/EUR weakened and USD/GBP relinquished some of the day’s gains.

Meanwhile, the Evergrande crisis continued to limit market risk appetite, which in turn lent some support to safe-haven demand for the US Dollar.

Shares in China’s second-largest property developer fell again as another debt payment deadline looms.

Pound US Dollar Forecast: US Data Releases in Focus

The Pound US Dollar exchange rate looks sensitive to more volatility in the coming days, with more high-impact US data releases.

Forecasts point to third quarter US GDP released tomorrow slowing to 2.7%, a sharp slowdown on the second quarter’s 6.7% reading, potentially denting USD exchange rates.

Ahead of the Federal Reserve’s November policy meeting, the PCE price index released on Friday could cause some additional movement in the US Dollar.

As the Fed’s preferred measure of inflation, the PCE index expected 4.4% reading may reinforce the central bank’s widely expected case to begin tapering its bond-buying programme.

Meanwhile, in the absence of notable UK data releases, Sterling will likely remain sensitive to investors reacting to the UK budget and accompanying growth forecasts.

Andrew Roberts

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