How the markets might react to the Chancellor’s Budget

March 18, 2015

Tomorrow is the UK Chancellor’s last chance to put his stamp on his tenure and an opportunity to unofficially get campaigning underway ahead of the UK General Election in just seven weeks time. With most economic measures now back to pre-crisis levels it is fair to say that the voters’ opinion of George Osborne have improved considerably since he was booed by the crowd in a packed stadium at the 2012 Olympics, when the British economy was just struggling out of its double dip recession. But it has been a long road to recovery with many still feeling the pinch, which is one of many reasons you can argue why the race to 10 Downing Street looks to be going down to the wire.

The Chancellor has an opportunity to try and get the voting polls moving in his party’s favour, but he won’t want to be seen to be buying votes. This will not prevent him from using this opportunity to his advantage however and the leaks we’ve already seen drip fed into the press, such as the increase in the minimum wage and extension of last year’s pension reforms to existing pensioners, show that there are likely to be some sweeteners for the undecided and swing voters.

Below we have a look at how the two key markets might react:

Sterling
With a slightly improving economic and fiscal picture since the Chancellor’s Autumn Statement last December, there’s the potential he will be more upbeat with upgrades to growth forecasts in the face of lower oil prices and falling unemployment, which should keep sterling supported. However, the biggest threat to sterling remains an outright Conservative government or worse still a Conservative and UKIP coalition as both are committed to having a referendum on EU membership. If this Budget is well received and looks like a vote winner, then this could have a negative impact on sterling, in particular GBPUSD which has already declined 4.5% in the month of March alone.

FTSE 100
The banking sector will be in focus to see if a final increase in the bank levy is imposed by the Chancellor who will want to appear as remaining tough against this still incredibly unpopular industry. With bank balance sheets continuing to shrink the rate of the levy will have to increase for the government to raise a similar amount to previous years. As a result there’s unlikely to be many investors looking to buy bank stocks tomorrow. A voting winning Budget could also trigger some profit taking in UK equities due to the increased likelihood of an EU referendum and considering how reliant the majority of FTSE 100 constituents are on our biggest trading partners on the continent, it has the most to lose.

With the polls still neck and neck if this was to remain the case from here to the election day, volatility for all of the above is likely to increase. If there’s one thing that markets don’t like it’s uncertainty and the excitement we saw in the run up to last year’s Scottish referendum might just turn out to have been a walk in the park.

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