Widening deficit piles pressure on Hammond, will Budget woes weigh on Sterling?

Yesterday’s poor government borrowing figures brought into question Chancellor Philip Hammond’s ability to deliver the kind of Budget markets are looking for, weakening the pound in the process.

Sterling starts today on mixed form. GBP/EUR has slipped to €1.1268, while GBP/USD has inched up to US$1.3255. GBP/AUD has posted a respectable advance to AU$1.7505, while GBP/NZD is also up and trending in the region of NZ$1.9380. GBP/CAD has slipped to C$1.6908.

Read on to find out why the pound’s initial reaction to today’s budget can’t be trusted…

What’s been happening?

Pound Sterling ended the day marginally lower against the euro and US dollar after the latest UK borrowing figures showed a larger overspend than economists had been expecting.

Excluding state-owned banks, borrowing rose from £5 billion to £8 billion in October, surpassing expectations of £7.1 billion.

Although year-to-date borrowing still looks promising, the unexpectedly large widening of the UK deficit meant year-on-year borrowing was up £500 million; the first time the annualised deficit has increased in several months.

This will further restrain Chancellor Philip Hammond’s ability to offer Budget handouts that might alleviate the burden of higher inflation upon consumers, tackle the UK’s productivity problem, or develop infrastructure to help the economy weather the potential fallout from Brexit.

GBP/EUR may have weakened, but elsewhere it was the euro that was under pressure. Markets were still reacting negatively to the collapse of German coalition talks on Monday.

The prospect of months of political turbulence in the Eurozone’s powerhouse economy gave markets little reason to buy into the euro yesterday.

Market fears that the US dollar’s appreciation on expectations of an interest rate hike next month was over exuberant weighed on the US dollar yesterday, despite a 2% uptick in existing home sales.

What's coming up?

Philip Hammond will present his Budget to Parliament shortly after midday. His initial headline statements could cause immediate volatility, but the pound could easily seesaw as the full details of his plans, and their impact, are unpicked and analysed throughout the day.

The euro may find some support from today’s Eurozone consumer confidence data, which is expected to show a climb from -1 to -0.9, although the gravity of developments on the UK and US economic calendars could leave this release overlooked.

US durable goods orders data is due out this afternoon, but markets may ignore this despite its high tier status.

This is because the minutes from the November meeting of the Federal Open Market Committee (FOMC) will be published after the close of the European session today.

Policymakers disappointed markets at the time by failing to show the kind of confidence that had been expected, so the US dollar could fall if the minutes spread the seed of doubt regarding the odds of monetary tightening next month.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Reaz Rahman
Senior Dealer

Reaz, our Senior Currency Dealer, joined us in January 2015. Reaz draws on his detailed knowledge of the foreign exchange markets to help customers to choose the right service and time to transfer.