Sterling and the Budget

16 March, 2016

Today is a big day for UK markets as the Chancellor presents his latest budget, detailing tax and spending plans for the coming years. To simplify things greatly, the way it used to work (as still does to some degree) is that all the unpopular and tough decisions are done early on in the parliament, allowing scope for pre-election give-aways close to the next election. It also used to be the case that there was a strong pre-budget ‘purdah’, but this is no longer the case, with the press peppered with stories about the way things are shaping up. These suggest that some of the Chancellor’s more ambitious plans on pension tax reform have been shelved, for fear of alienating their core area of political support, but given his recent comments on the economy, it’s not going to be a ‘giveaway’ budget.

So what about sterling? The UK currency was feeling heavy yesterday, cable falling from 1.43 to 1.4150 on nothing in particular. We were in a more risk averse environment (equities and oil lower) and it appears that cable is seeing a stronger negative correlation to risk. If we take the Citi risk measure (basket of assets creating index that rises when markets are feeling less risky and vice versa), sterling’s inverse correlation to it has been increasing of late. There was a modest positive correlation in the last 3 months of last year (0.14), compared to a negative correlation of 0.23 so far this year. For reference, the Aussie has a correlation of -0.40, with the yen the other end at 0.48.

On top of this, we have a Chancellor who was sounding a more cautious note on the economy over the weekend (the forecasts come from the independent OBR) and who is also likely to throw in the odd warning of the risk of Brexit in his speech today. This could well bring more caution on the part of the currency and I find it difficult to see a bullish outcome for sterling from budget today, with longer term investors likely to be selling into rallies as the Brexit referendum looms ever larger and give reason for more hedging from overseas investors.

Budget aside, we also have the US FOMC meeting later today, where no change in policy is expected, but the Fed is expected to revise it’s so-called ‘dot-plot’ of projections for future policy changes, which in December foresaw nearly 4 increases in rates before the end of 2016.


Source link  
Markets look to Central Bankers

Asian Equities traded higher on Tuesday approaching near two-year highs on Tuesday as USD strength helped exporters...

Global Economic Optimism Continues

Global equities moved higher on Monday as optimism continued to improve on global economic growth. However, USD...

BOJ Monetary Policy Remains Steady

The Bank of Japan maintained their monetary policy on Friday whilst upgrading their assessment of private consumption...


Final Confirmation for a June Rate Hike

The crucial US labour market data for May will be released today, June 2nd at 13:30 BST. It includes non-farm payrolls...

GBP Under Pressure

The Brexit negotiation process is one of the focuses of the upcoming UK election. Although the Conservative Party has pledged a smooth and orderly...

Oil Slumped Post OPEC Extension

On Thursday, OPEC announced that the existing output cut agreement will be extended for an additional 9 months...


USD Bounces From Month Low

Trump administration has presented its 2018 budget plan to Congress last evening. The budget plan calls to slash $3.6 trillion...

Dollar index hit a new low

The dollar index hit a new post presidential election low of 96.95 on Friday May 19th. EUR/USD hit a high of 1.1211...

USD Hit Post Election Low

To date the dollar index has almost given up all of the post presidential election rally...

  


Share: