The currency blog

Chancellor George Osborne’s produced the toughest Budget in a generation yesterday with Britain facing drastic cuts of 25% to government departments. The exception will be those departments with “protected budgets,” such as the National Health Service and foreign aid. Other key take outs include an increase in the VAT from 17.5% to 20% from January next year and a new £2 billion levy on the banks. The budget reveals a more rapid fiscal response than that planned by the previous Labour government. The Chancellor said, “This emergency budget deals decisively with our country’s record debt.”

The budget also found support from Fitch, the rating agency, who stated the budget “…sets out an ambitious deficit reduction path that, if delivered upon, will materially strengthen confidence in UK public finances and its ‘AAA’ status.” The Office for Budget Responsibility cut it’s economic growth forecast to 1.2% this year and GDP growth next year has been cut to 2.3%.

The news provided further support for Sterling yesterday as it rallied against the Euro and the Dollar. Pre-budget we were trading GBPEUR 1.1960 and GBPUSD 1.4730, the markets view this as a credible plan and we currently sit at 1.2139 and 1.4924 respectively. Despite the positive reaction, some city analysts have taken a different view and fear that removing £40 billion out of the economy might halt the recovery from recession and ultimately push borrowing higher as tax receipts fall and welfare costs increase.

It was a mix bag of data from Europe and the US yesterday. As expected, German IFO indicated steady current conditions amongst business leaders but a more pessimistic outlook in the long term. This was coupled with strong German consumer confidence. Over to the US and existing house sales numbers were below par despite the continuing tax incentives for the housing market. Although we saw little reaction in the currency markets, (EURUSD currently sits at 1.2279 from a high of 1.2320 yesterday) equities did sell off at the close leaving a weaker outlook for stocks across Europe and Asia.

This morning, we had the minutes from the last MPC meeting who voted 7-1 in favour of holding interest rates at 0.5% which has boosted the Sterling rally against the single European currency and the green back mentioned earlier in the report.

Later tonight we have the Fed Reserve interest rate decision who are expected to leave interest rates on hold…. It is also widely anticipated that the England team will continue their terrible form and will be back at Heathrow airport tomorrow.

Discuss on this on the Currency Exchange Forum