27 October 2021: Neutral fiscal position necessary

Neutral fiscal position necessary

27th October: Highlights

  • Budget to set tone for economic restart
  • Consumer confidence rebounds
  • Euro turns bearish ahead of ECB

Increase in minimum wage replaces UC bonus

Later today, Chancellor of the Exchequer, Rishi Sunak will present his Budget to Parliament.

However, Sunak has drawn criticism from the Speaker of the House for continuing a recent trend for important announcements to be made at press conferences rather than in Parliament.

Most of the most eye-catching policies have already been leaked. They include an increase in the minimum wage, the removal of the pay freeze in the public sector, a £5.9 billion payment to the NHS to cut waiting times, funding for the Government’s levelling-up initiative as well as the creation of new T-Levels in schools that will provide qualification sin more practical subjects.

The more mundane issues of excise duty increases and unpopular rises in taxation will be provided from within Parliament’s protected halls.

Overall, the Budget is expected to usher in the new post-Covid, and to a certain extent, post Brexit world that has been promised.

Covid cases continue to rise putting pressure on the Health Service and several other sectors of the economy. Rates of infection are at highs not seen since last March as the Government places all its eggs in the basket labelled Booster jab.

One of the prominent announcements that have already been made that will be included in the Budget is the increase in the minimum wage from £8.91 per hour to £9.50 per hour.

It may be a coincidence, but this equates to £20 per week for a full-time job which was the same amount as the amount of the Universal Credit additional payment that was withdrawn recently.

It is unclear whether it was meant to be so, but the Government appears to have launched a better off working scheme to combat the number of low paid workers who appear to claim benefits rather than look for work.

Overall, the budget is expected to begin the long March towards a more skills-based economy, with Sunak celebrating the fact that the country and its economy are returning to health both physically and metaphorically.

With the most positive events already known, the pound is unlikely to be boosted by the Budget.

Yesterday, it climbed to a high of 1.3829, but fell back to close little changed on the day at 1.3764. The price action that has been seen lately looks unconvincing and may be the start of a return to the previous range.

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Homes and big-ticket items top the list

The consumer remains at the centre of the country’s return to health following a minor dip in activity and output.

It seems that in the run-up to the most important period of the year with Thanksgiving, Black Friday and Christmas on the horizon has galvanized consumer confidence with the latest data, released yesterday, showing a significant rise.

Confidence rose from 109.8 in September to 113.8 in November. This followed three months of declines. The index rallied to a high of 128.9 in June and has gradually fallen in response to the rise in cases of the new variant of Coronavirus and higher prices, as inflation has gripped the economy.

There is no doubt that the third quarter was a little rocky, but markets are looking at that as little more than a bump in the road, as confidence and optimism return.

That optimism has spread to the labour market, with expectations for next week’s employment report showing both a significant rise and a revision to September’s poor numbers.

Before that, the FOMC will announce its decision on monetary policy one week from today.

It seems that the additional support, described by Fed Chair Jerome Powell as bringing in the emergency crew, will begin to be removed.

It seems that the expected rally in the dollar index that tighter policy will bring has already been priced-in, so the risk for the dollar is to the downside, bringing a test of major support at 93.50 should the FOMC disappoint markets.

Stock indices continue to make record highs, which would indicate that traders are comfortable that any withdrawal of support won’t hit them too hard.

Yesterday, the dollar index was in a narrow range. It hit a high of 94.02 but drifted lower to close at 93.94.

Slowing economy will need accommodation for longer

It has become fashionable for Central Banks to ignore their currency. When policy decisions are made, the currency seems to now be at the end of the line of considerations.

That is particularly true of the euro that is unlikely to be considered tomorrow, when the likelihood is that the ECB will vote to retain its current level of support for the economy.

It is likely that this will be labelled as important given the fact that the economy may have hit something of a soft spo9t recently.

Inflation remains a contentious issue, but the ECB President has chosen to fight it by ignoring it, hoping that next time she looks, it will have abated.

Unfortunately, that is not likely to occur naturally given the rise in fuel prices that make up a significant part of household expenditures across the region.

So, with Lagarde’s disregard for price rises, the inflationary effect of a weaker currency also finds itself in the pending folder.

Of course, a weaker currency will make Eurozone exports more competitive by from what has been seen recently, price is not the major consideration given the quality as well as productivity gains that have been made by Asia’s powerhouse manufacturing economies.

Being predictable is often another term for boring, but isn’t that what Central Banks should be?

Well, it is always good to be able to keep the markets thinking rather than spoon-feeding them advance guidance.

That is another ideal that Ms. Lagarde has disposed of. ECB watchers have been told they may as well hibernate through this winter, as there will be no change in policy before Spring returns.

Tomorrow’s ECB meeting may be being labelled a non-event, but there is always that tiny possibility that it may spring a surprise, and that will keep the market interested.

Yesterday, the euro fell to a low of 1.1585 and closed at 1.1595. Until it breaks below the 1.1550 level it is unlikely to spark too much interest either.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”