The emergency budget was always going to have an effect on the FX markets, just which way was anyone’s guess.
Yesterday and this morning saw relatively low levels of trading as traders and investors wondered if the Chancellor would be able to get the balance just right in making the necessary cuts whilst allowing room for growth. Most of the city knew that the budget would be very strict and from the word go Mr Osbourne made it clear that he had no intentions of hiding any proposed cuts in the small print, for his efforts he received a round of applause in the House of Commons.
There are many points that will need to be addressed but for the time being I will look at the most important figures. Growth in the economy is forecast to be 1.2% this year, 2.3% next year and 2.8% the year after. This is not stellar growth but it is growth nonetheless.
Unemployment is likely to rise to 8.1% this year but then fall for the next four years after that to 6.1% in 2015. I fear this may be somewhat ambitious as unemployment is the hardest area to rectify for a government but for the time being these figures will be well received as U.K unemployment levels have been well documented as of late. Whilst these figures look to improve the general outlook, there will be some casualties along the way, the public sector will be subject to a pay freeze for the next two years with many areas facing job losses in the coming year.
The big issue was of course the VAT increase to 20% which will be felt by everyone. Some would suggest we had it coming given the drop to 15% last year, however, the strain of a VAT increase is likely to be felt much more then the relief of the VAT decrease. The increase is not due to come into effect until January 4th next year so we may see a short term boom in retail sales figures around Christmas time.
There are many other areas that deserve analysis but there is simply not the time to go through all the points in depth right now. Furthermore, many analysts will be hard at work crunching the numbers to see if the proposed cuts are feasible. The slight hint that Mr Osbourne has over stretched himself is likely to cause a detrimental drop in confidence for the U.K. For the time being though the budget has had the desired effect as ratings agency Fitch backed the budget by saying the measures to reduce U.K debt look to be in line with what they saw as necessary to avoid a rating downgrade. “The market has taken the view that the Budget is tough enough to address the UK’s fiscal position and sterling has rebounded as it should help keep the ratings agencies at bay,” said Ian Stannard, senior currency strategist at BNP Paribas.
A quick look at the FX markets and having hit a low of 1.1953 Sterling has rallied to 1.2066 having hit a high of 1.2079 (interesting to note that 1.21 still seems elusive). Against the dollar a 0.60% gain on the day sees Sterling into the mid $1.48 levels at $1.48425 and just shy of the day’s high. Not one to rain on a parade but these rallies should be approached with caution as already market analysts are pointing to the longer term outlook for growth which will curb any Sterling gains. The outlook remains bullish for Sterling during this honeymoon period.
