Giveaway budget fails to impress markets

Today's news headlines:

  • ‘Sterling slips despite upgraded economic forecasts’. Analysts said ahead of the much-anticipated budget that the Pound will be driven by headlines relating to Brexit more than domestic politics. (Financial Times)
  • ‘German Chancellor Angela Merkel will not seek re-election in 2021’. Merkel has said her fourth term as Germany’s chancellor will be her last. (The Guardian)
  • ‘The Australian Dollar remains the whipping boy of currency markets’. The Aussie fell heavily again on Monday, undermined by renewed weakness in the Chinese Yuan, heightened geopolitical concerns, and a late drop in US stocks. (Australian Business Insider)

The UK’s Chancellor of the Exchequer delivered his budget to the UK parliament yesterday, but despite signs of upgraded growth forecasts, the markets didn’t cheer the outcome. Sterling fell heavily against the Dollar and failed to make any headway against the Euro. Many factors had already been leaked, and whilst the decision to accelerate changes to income tax may curry favour with the electorate, this is money the government could still have been using to pay down debt. The proposals still need to be passed by parliament, but the performance of the Pound belies the apparent upbeat tone of Phillip Hammond.

Other big news yesterday saw Angela Merkel announce that she would not be seeking re-election in 2021. Her coalition party is evidently struggling to maintain traction following heavy election losses at the weekend, but the bigger risk here is a leadership challenge within her CDU party. Although Mrs Merkel has said she would like to remain at the helm for the next three years, leadership contenders are already coming forward. The uncertainty this could bring given Germany’s pivotal role within the EU, could continue to chip away at confidence in the common currency.

Eurozone Gross Domestic Product (GDP) data is on the table for release later today. The advance Q3 number for the entire bloc is set to be published at 10am GMT and this is tipped to show some contraction. Expectations are for 1.8% to be posted, down from 2.1% in Q2 but an undershot here could raise more questions over the European Central Bank’s (ECB) commitment to maintain that hawkish line over monetary policy. We will also see a number of individual member Euro states publish their GDP prints. Italy’s figure, in particular, will be under scrutiny as any impact of falling inward investment in the face of political uncertainty is likely to manifest itself here.

Across the Atlantic, we have US consumer confidence data for October due to be published at 2pm GMT and this has the potential to flag up emerging weakness in the economy. High oil prices, rising interest rates, and the impact of trade tariffs are all likely to be taking a toll on the appetite of consumers to keep spending. In recent days we’ve also seen the PCE readings – the Fed’s preferred measure of inflation – show a modest cooling here. The DXY Dollar index is once again eyeing a test of fresh highs for the year, so any concern over the outlook for economic prosperity could readily initiate a degree of Dollar selling – even if it does prove to be short-lived.

GBP/USD

The GBP/USD pair slumped back towards the lows seen at the end of last week, and although we are seeing some support early in Tuesday’s European session, as long as Brexit uncertainty prevails, then the Pound is arguably going to struggle to find supporters.

EUR/USD

The EUR/USD pair is seeing some buying support early in the European session, although it remains close to lows from the summer. We didn’t see much of a reaction off the back of Angela Merkel’s news, although mounting political uncertainty at the heart of the Eurozone could weigh on the common currency.

GBP/EUR

Sterling continues to lose ground against the Euro and yesterday’s UK budget did little to stem the slide. A significant shortfall in Eurozone GDP may be sufficient to lend some support in the short term, but with Brexit looming, the Pound seems destined to remain on the back foot.