UK Budget adds a Little Realism

Sterling treading water

If there were any proof needed that Brexit is the “only game in town”, it was provided by the reaction of markets to yesterday’s budget. The outlook for growth until 2021 was slashed by the Chancellor of the Exchequer Philip Hammond, yet the pound barely reacted closing just four pips lower than its open versus the Euro at 1.1269 although it did make ground against a dollar weakened by concerns over monetary policy in the US (more below).

Hammond took the opportunity to paint the bleakest picture he could for the economy which will have the dual effect of getting the bad news out while the focus of the market is elsewhere and giving himself leeway for self-congratulation should the situation turn out to be not as bad as he predicts.

The outlook for growth until 2021 was lowered from 2% in March to 1.5% as the effect of Brexit on trade and business investment going forward was fully factored in. Hammond provided a little help to the housing market, but this was more in the shape of incentives and tax changes rather than actual hard cash to invest in house building.

Brexit is overshadowing every aspect of the economy as traders await official confirmation that the U.K. is going to offer forty billion Euros as its contribution to the EU Budget to kickstart talks on stage two of the process.

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Dollar suffers as future rate hikes called into question

The dollar index which measures the performance of the dollar against six of its major trading partners fell yesterday on news that members of the FOMC are becoming concerned about where the inflation needed to justify future interest rate hikes in the U.S. is going to come from.

The minutes of the most recent Fed. meeting were released yesterday and showed that even a December hike is far from certain.

The dollar index reached close to a one-month low on the news as the prospect of the dollar’s interest rate advantage faded a little.

Fed. members look to have provided just enough advance guidance to keep the markets believing that there will be a hike next month but as Jerome Powell takes over from Janet Yellen as Fed. Chair further hikes will be more data driven with pre-emptive action being shelved.

The dollar was also affected by a fall in durable goods orders in October. This is a notoriously volatile number since it deals with “big-ticket” items but it also provides an insight into future economic activity as it refers to long term capital orders. Durable goods orders fell by 1.2% in October following a 2% rise in September which was revised lower from 2.2%.

Putting on a brave face

The shock over the announcement earlier in the week that German Chancellor Angela Merkel is struggling to form a coalition Government to lead Germany for the next four years has faded somewhat as the publicity machine swings into action painting a slightly less grim picture than had first been imagined.

Mrs Merkel is apparently at her desk ruling Germany as she has for the past twelve years and the operation of Government is continuing under her caretaker rule and this can go on indefinitely. It is unsatisfactory, but it works for now. The more right-wing newspapers across Europe, particularly in the U.K. are painting a picture of Europe in disarray with Spain’s crisis over Catalonia, Italian Banks about to collapse and now German electoral chaos. The reality is, naturally, a little different and the EU continues to be driven as much by the will of the people for it to succeed as it is by the politicians.

The common currency is being driven by outside factors for now, in particular the weakness of the dollar. It reached 1.1828 yesterday and has continued to move a little higher overnight reaching a high of 1.1839. The major resistance is at 1.1880 which looks unlikely to be seriously tested for now.