UK Budget Watch : Pound Sterling and FTSE Gain

Modified: Wednesday, 18 March 2015 23:49 BST - Written by John Cameron

STORY LINK UK Budget Watch : Pound Sterling and FTSE Gain

This afternoon’s pre-election Budget Statement from Conservative Chancellor of the Exchequer George Osborne has been generally supportive of the Pound Sterling. The UK unit was floundering in the global currency market and trading down against each of the other sixteen most actively traded global currencies by the time Osborne took to the lectern at 1230hrs GMT today.

Sterling had been suffering thanks to a weaker than anticipated showing from this morning’s domestic labour market numbers which revealed that, although the total number of unemployed people in Britain had dropped by some 102,000 to 1.86m, the overall proportion of the unemployed had steadfastly remained at 5.7%. The result came as a disappointment because investors had been expecting a drop to 5.6%. The Pound Sterling euro exchange rate dropped to as low as 1.3786 as a result.

The minutes of the latest Bank of England monetary policy committee meeting, published at the same time as the UK jobs numbers, showed that once again, all nine members of the Bank’s steering committee had voted to maintain domestic interest rates at their current level. The notes explained that the BoE decision was driving by the weak outlook for British inflation in the short to medium term. However, the minutes were judged to be to be mildly Sterling-positive because of the revelation that two committee members had described their decision to vote ‘no’ to a domestic rate hike as ‘finely balanced’. Market participants inferred from this that next month’s BoE minutes may show that the expected ‘no change’ decision was not 9-0 again. Any future suggestion that Base Rate may be heading Northwards would help the Pound.

Osborne’s budget proved to be a business-friendly one – London’s FTSE 100 closed up by 6946 thanks to the Chancellor’s announcement that UK Corporation Tax would be trimmed to 20%. Upward revisions to the government’s official GDP growth forecasts for 2015 and 2016 provided the Pound with further assistance.

Looking ahead, the next major risk event of note for the GBP EUR exchange rate comes this afternoon with the US Federal Reserve’s latest monetary policy announcement. If the Fed Chair Janet Yellen suggests that US interest rates might be on the way higher in the near-term, then the US Dollar (currency:USD) is likely to gain at the euro’s expense, sending GBP EUR higher.

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