CURRENCY UPDATE – THURSDAY 25TH MARCH

CURRENCY UPDATE – THURSDAY 25TH MARCH

It's a big day for the Chancellor today as he delivers his (most likely) last ever budget. As Labour is going to get kicked out of power in a few weeks what is announced today will not actually be implemented, but the general tone of the budget will indicate the Labour party's willingness to cut the deficit, which could be important in the event of a hung parliament and a possible coalition government. The election is within sight now so there isn't going to be any clear rises in income tax or VAT, otherwise Darling may find himself lynched by the Labour benches before he leaves the chamber, but neither will the budget be a pre-election give away, as any grandiose spending plans are likely to be treated with derision. Borrowing is likely to undershoot forecasts for this year, and this could give the Chancellor a little space for some modest spending, and no doubt no10 will be putting pressure on Darling to do so, but he would be wiser to keep the borrowing down and the budget modest.

The Pound has remained subdued ahead of the budget, hovering around 1.50 against the Dollar. There was some better economic news out of the US yesterday with existing homes sales falling less than expected, while a manufacturing survey showed some improvement. However the problems between the US and China over currency manipulation continue to weigh on risk appetite, keeping the Dollar strong. The USD has pushed the Euro down below 1.34 over the course of yesterday.

Yesterday's inflation figures for the UK have been taken as good news for the economy overall, with the moderation of the CPI down to 3% making a rate rise this year extremely unlikely. The fall has not been such good news for the Pound, but it has not really weighed on it either, although it has kept relatively weak against the Dollar, it has put in a decent rally against the Euro, as the single currency is again weighed down by Greek debt problems. The rumours and haggling continue on, with France and Germany now apparently agreed that any bailout should include the IMF, but Germany is only willing to help as a measure of last resort, or as someone put it yesterday 'when the body is cold'. Such talk is not very reassuring to Greece's government who need some kind of stop gap in place, just to make borrowing cheaper for their government, and it has weighed on the Euro allowing the Pound to recover up to touch 1.12 early this morning.

So the budget will dominate the economic and political headlines for the UK today. It will contain some forecasts for growth and borrowing, unchanged and lower respectively, and probably some kind of modest spending initiative in an attempt to grab the headlines. As stated above, the things announced today will not be implemented as Labour won't be in power after the election, however if the Chancellor can give a responsible budget that provides some direction to reducing the deficit, then it should be positive for the Pound.

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