While it would be easy to start speculating on the pounds fluctuation since the budget speech on Wednesday, initially up and then down against the dollar and euro, it would be best not to do so.
Before we read too much into these fluctuations, we should remember two things. Firstly, the pound was already weaker in the days leading up to the Budget, and secondly, there is a lot of noise in the world right now (the USA alone is producing a constant flow of news!)
Whatever the budget might or might not mean for the pound, it is very likely to be overshadowed by developments affecting the euro and the greenback.
Putting this “noise” to the side for a moment, here’s a breakdown of the budget and what it means for the pound:
Firstly, this was a case of sell the rumour, buy the fact. The market was a little nervous that the budget might uncover a worse than expected fiscal position, and Sterling was sold off in anticipation. So the initial reaction was a small relief rally. The current fiscal position is not dire, but it’s not great either.
GDP growth was a little higher than expected and forecasts were upgraded slightly – while that’s a positive for the Pound, it was already in the price.
Tax receipts were also higher than expected – neutral for the Pound.
Little in the way of fiscal stimulus was announced – positive in the short term but will be negative in the long run.
The conservative nature makes a rate hike less likely – which is not good for the pound.
Ultimately this was a neutral budget and there was very little in the Chancellor’s speech to sway the market either way.
Uncertainty is the biggest factor weighing on sterling at the moment – when we have more certainty about Brexit the trend will change as investors start committing capital to the UK economy again.
Looking ahead to the ECB press conference, while no change is expected to rates, the market will be looking carefully at the language used in any forward-looking statements. Any talk of higher than previously expected inflation or growth is likely to be negative for the pound against the euro.
Friday’s Non-Farm Payrolls in the US are likely to confirm the market’s expectation of a rate hike next week. However, a weaker than expected number will be positive for the pound. An inline or better than expected number would be negative for GBP, but is more or less priced in already.
When the fundamentals are this indecisive it is best to look at the chart. The shorter-term charts are showing a clear trend toward GBP weakness. Resistance at 0.8669 is all but broken which makes 0.885, the January high, the obvious target.
The highs we saw in the October ‘flash crash’ give us an indication of the levels that market considers a ‘no-go zone’. So, while 0.8869 is a likely target, 0.90 and above would be unlikely unless we see a fundamental change in the economy.
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