Autumn Statement paves way for slow recovery

6 December, 2012

Simon Eastman

Early on Wednesday the pound was holding up, thanks to the services PMI figure, which were lower than expected but showing growth in the sector. Coupled with the PMI releases from the EU as a whole and a number of European countries individually, all coming in below the threshold of 50 which shows contraction, pound/euro exchange rates seemed to be making back the losses of the previous day. To compound the Euro, EU retail sales came in at -3.6% compared to the predicated -0.8%.

Of course the main event of the day was yet to come, so with the autumn budget weighing heavily on traders’ minds, the gains were limited for sterling across the board. Finally the time came for George to give his verdict and he didn’t disappoint. Bearing in mind the markets were expecting the worst, when he opened with a half hearted gag about the British economy healing, although taking its time, the tone was set for some poor results. Indeed growth was readjusted down and confirmation came about the failure to meet the debt reduction targets, although it was packaged within some tax relief and fuel duty abolition for January next year. Unfortunately the damage was done and the pound was falling across the board, all except initially against the Euro. It seems the previous data for the single currency was keeping the pound just ahead although even that didn’t last as trade closed a quarter cent down from the peak of the day.

A mixed bag of data from the US in the afternoon gave a fairly tight trading range as negative data coupled with the broadly weak dollar meant even George Osborne couldn’t damage cable much. Rates for those sending money stateside still remain at near month highs so take advantage sooner rather than later just in case the tide turns.

Despite the negative tone for the budget, markets were expecting as much, as reported in Tuesdays analysis. As such, although the pound did lose value against every currency, the losses were limited to around 0.3-0.4% on average as markets had priced in a negative budget. We highlighted the losses the pound made on Tuesday, coupled with yesterdays and it’s not so limited. If you have any currency requirement to tie up before the festivities begin, it might be prudent to speak with us here at Currency Index sooner rather than later, just in case the downward trend for sterling continues.

Today we have UK house price and trade balance data, while the EU releases its GDP reading. Then we’re on to the battle of the central banks as both the Bank of England and European Central Bank publish their latest policy decisions on interest rates and asset purchase, with ECB’s subsequent press conference. We don’t expect change on either side but nothing can be held for granted. A surprise increase in asset purchase to help UK growth, following the poor budget, can’t be totally discarded surely….