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  
Divergence Between Fed and BoJ

The March FOMC meeting will be held for two consecutive days from today. The interest rate decision will be announced at 18:00 GMT on Wednesday 15th March...

Market Volatility Expected Ahead of President Trump's Speech

In a speech that will be watched by millions of viewers in the United States and around the world, the President is expected to speak of his presidency and address pressing issues like his plans for health care, the tax system, the military, and his goals for his administration...

Gold Trades Below Resistance Ahead of the Fed and NFP

We will see the release of the US ISM Manufacturing PMI, and ISM Prices Paid for January, at 15:00 GMT on Wednesday 1st February...


Sterling Struggles Ahead of Theresa May's Speech

Theresa May will make a speech outlining her plans for Brexit tomorrow, Tuesday 17th Jan, before the UK triggers Article 50 to leave the EU...

Dollar Turn-around on Trump's Press Conference

President Elect Trump's first press conference after his victory in the US presidential election, was held yesterday around at 16:00 GMT. It has caused great volatility to the dollar and the markets...

Gold Nears Major Resistance Ahead of Trump’s Press Conference

Gold prices have rebounded since mid-Dec after testing the significant support line at 1120. On the 4 hourly chart, gold bullish momentum has been strengthened since the beginning of this year, helped by the dollar retracement...


Searching for a new narrative

Popcorn at the read today as President elect Trump has a scheduled news conference later in the day (around 16:00 GMT). Markets have become used to listening to him in 140 characters or less over the recent weeks, so a more elongated narrative should be welcome...

The sterling conundrum

Yesterday's early weakness in sterling, on the back of the latest comments from PM May surrounding Brexit, took cable close to key support levels and the resilience seen through most of the post US election period has been unwound...

Selling into USD strength

In summary, Friday US jobs report was pretty much in line with expectations, although the slightly better data on earnings gave some support to the dollar into the end of the week. As a result, the US currency was little changed from Tuesday opening levels...

  


Share: