A mixed budget for sterling

17 March, 2016

Simon Eastman

Wednesday was molded by George Osborne’s budget report at midday although the overall trading range was pretty slim. The day started with a pretty non-event in the ECB non-monetary policy meeting followed by the unemployment rate and average earnings data from the UK. Although fairly low key in importance, the rates came out better than expected and gave the pound a bit of a boost across the board. As the chancellor started to read out his spring budget, the US released some inflation figures and house build data, all showing an improvement to forecasts and allowing the greenback to edge ahead, gaining half a cent against both the pound and the euro.

As the budget was read out the markets acted accordingly with various stock price sectors benefiting for example oil stocks gained on the North Sea exploratory help whereas makers of sugary drinks like Red Bull nose dived as the sugar tax was introduced. One comedic moment came as Tate & Lyle stocks plummeted on the news, only for traders to realise T&L stopped their sugar interests some time ago and the stock levels crept back up again.

As for the pound, with talk of budget deficit increasing and the growth forecast being downgraded this didn’t help the pound and we saw it slide against its major counter-parties. Its doom and gloom which we are fairly used to though with the reality of low inflation and low interest rates for some time already well in the forefront of most investors the news wasn’t a great surprise. As such, over the rest of trade the rates picked back up and sterling finished around the same levels as its open, the day’s range being fairly slim as markets looked towards the US and the FOMC interest rate meeting and policy statement early evening, New Zealand’s GDP later that evening and Aussie unemployment figures overnight.

The Fed kept interest rates as they were, which was no surprise but the accompanying statement was very dovish, pushing back further any expectations of another interest rate rise. They also cut GDP growth forecasts by 0.2 percent for this year and next year. Investors were expecting a slightly more hawkish stance, with maybe a hint towards another rate rise mid-year so the actual stance disappointed and subsequently weakened the dollar by 1.5 cents against the pound.

New Zealand’s GDP improved more than expected giving the Kiwi a boost, coming in at 2.3 percent over the 2 percent forecast. The Kiwi had already gained after the Fed decision so with this good ecostat, the gain was around 5 cents against the pound over the night.

Finally, the Aussie employment data was a mixed bag, with the number gaining employment expected to be really positive, with a reading of 10 compared to last months negative 7.9 reading, but it just scraped in at 0.3 positive. The actual unemployment figure beat forecasts though coming in at 5.8 percent rather than 6 percent. The mixed bag meant little gain for the Aussie although as a commodity based currency, benefiting off the weaker US dollar, it had already gained 2 cents against sterling yesterday evening.

With the hawkish stance of the Fed, we have seen a switch to more risky trades overnight with the higher yielding commodity led currencies benefiting. Those with a AUD, NZD, ZAR or CAD requirement coming up might be wise to look at booking your trade sooner rather than later in case the trend continues at a similar pace to the one we saw overnight.

So on to today and we have plenty to go on again. The Swiss kick things off with their interest rate decision, followed by EU trade balance and inflation figures at 10am. At lunchtime we have the Bank of England MPC interest rate decision, policy statement and minutes all released at the same time, finishing the day stateside with some jobs data. With this in mind and the pounds recent decline, anyone with a transfer to make in the coming days or weeks may be prudent to speak with one of the team today about pre-booking your requirement on a forward contract.