UK budget in focus as market looks for post-Brexit insight

Today's news headlines:

  • ‘Hammond to warn that austerity’s end hinges on Brexit deal’. Chancellor signals tax cuts and higher spending are at risk if the UK’s unable to agree with the EU. (Financial Times)
  • ‘Italy is setting itself up for a monumental fiscal failure’. Without a clear-headed strategy for a Eurozone exit, the Italian government is setting itself up to fail. (Financial Times)
  • ‘Draghi defends ECB independence amid Italian populist attack’. The ECB Chief was drawn into a public spat with his homeland’s government after highlighting risk from rising bond yields. (Bloomberg)

On Friday, the DXY Dollar index found its charge higher stalling in the wake of tepid Personal Consumption Expenditure readings from the US Department of Commerce. This is seen as being the preferred measure of inflation by the Federal Reserve rather than the more mainstream CPI print. As such, the shortfall here—1.6% vs an expected 1.8%—has called into question whether the US central bank needs to maintain such an aggressive stance over policy tightening, or whether there may be scope to adopt a more dovish line in the medium term. This minor adjustment in outlook certainly isn’t hampering the Dollar’s overall strength, and with both Sterling and the Euro facing their own well-reported challenges right now, there’s reason to believe any weakness could prove short-lived.

The UK government announces its latest set of budget plans at 12.30pm GMT today, with the numbers poised to show a significant improvement in the health of the economy. Tax receipts are up, whilst the long period of low interest rates means repayments on government debt are also down. The headline fact is that a decade after the financial crisis, this will mark an end to austerity, but currency markets will be looking for longer-term growth forecasts if there’s to be any meaningful support for Sterling off the back of today’s news. However, the bigger concern is that the Chancellor is making no secret of the fact that a no-deal Brexit will necessitate a further emergency budget to be written.

Germany’s political scene is facing a degree of turmoil in the wake of weekend elections which saw Angela Merkel’s coalition receive a bloodied nose. There are concerns that other parties could walk away from the fragile affiliation which has served to keep Ms Merkel in power, and in turn, have wider repercussions across the European Union as a whole. Last week we saw the European Central Bank (ECB) take a positive line over its economic projections despite some downbeat macro readings in the days prior. However, with the European Commission set to release its growth forecasts for member states today—plus those lingering tensions between Rome and Brussels—there’s certainly scope for the mood towards the common currency to sour in the short-term.

After Friday’s quarterly Personal Consumption Expenditure readings from the US, today sees the publication of the latest monthly data, which given the theme of a slowing economy, would be expected to come in showing nothing of concern. The risk here may well be weighted on the downside as factors such as rising oil prices and interest rates will be taking a toll on economic sentiment, but with a modest reversal of the Dollar’s fortunes having already been seen, this may simply be setting the Greenback up for its next march higher.

GBP/USD

The pair hit a two-month low on Friday ahead of US data releases. Further short-term support for the Pound could be seen depending on how upbeat Phillip Hammond is over the UK’s economic outlook. But with Brexit uncertainty lingering, Sterling has the potential to remain under pressure in the medium-term.

EUR/USD

Similarly, a test of two-month lows on Friday proved short-lived. The Eurozone is showing some respectable economic growth right now, although political tensions are building. From the emerging stand-off over the Italian budget to the future of Germany’s leadership and Brexit, there’s no shortage of risk factors that could serve to quash any nascent rebound here.

GBP/EUR

Today’s UK budget has the potential to lend some support to Sterling, especially if it contains clues over the economic implications of a no-deal Brexit. Whilst Mr Hammond has already stated that this will necessitate an emergency budget, anything that illustrates what the worst-case scenario may look like could be taken as a positive, and in turn, bolster the Pound at least in the short-term.