Monex Europe: Today’s budget forecasts reiterated the UK’s weak economic fundamentals
Monex Europe: Today’s budget forecasts reiterated the UK’s weak economic fundamentals
Commenting on today’s Autumn Budget statement, Simon Harvey, Head of FX Analysis at Monex Europe, said the following.
Chancellor Jeremy Hunt took a much more orthodox approach to today’s Autumn statement following the disastrous mini-budget presented by his predecessor Kwasi Kwarteng at the end of September. Paying homage to independent and credible institutions such as the Office for Budget Responsibility and the Bank of England, Chancellor Hunt took the early steps to try and restore investor confidence in the UK. He then sought to compound this throughout the Autumn statement as budget measures looked to fill the projected £64.2bn fiscal hole that had arisen in this year’s finances alone since March’s Office for Budget Responsibility (OBR) projection with a fiscal consolidation of £55bn.
The Chancellor also reinstated fiscal rules, which will see debt-to-GDP fall by the fifth year of a five-year rolling period and public sector borrowing over the same period stay below 3% of GDP. While the measures announced largely fell in line with those drip fed to market participants this week, the overall consolidation efforts look much more back-loaded than initially suggested as a flurry of near-term support measures to the economy were also announced. The deficit reducing measures announced primarily focused on increasing tax revenues in the near-term, while limiting the growth in public spending over the later periods of the five-year projection.
Despite the swathe of measures announced in today’s budget, the economic spectacle had a very limited lasting effect on GBP assets. Although the announcement of the OBR’s bleak economic projections initially sent sterling close to a percentage point lower as gilt yields rallied, the moves earlier in the day soon began to retrace as the consolidation measures were reeled off by the Chancellor at a rapid pace.
The main takeaway from today’s budget was that it exposed the bias of traders to sell the pound at current levels. While this bias was visible earlier this morning, it was put on full display as the OBR’s projections reiterated the UK’s weak economic fundamentals. We favour fading the recent GBP rally further towards 1.15. Following the budget, hawkish commentary from FOMC member James Bullard extended losses in GBP below 1.18 as the broad dollar began to rebound from recent lows. The subsequent drop in the pound shouldn’t be associated with any budgetary impact.