30 Oct 2018: Expansive Budget fails to lift Sterling

Expansive Budget fails to lift Sterling

October 30th: Highlights

  • End to austerity dependent upon Brexit
  • Euro under pressure as Merkel confirms retirement
  • Dollar struggling make fresh headway

Chancellor hails end to austerity

The UK’s Chancellor of the Exchequer presented his budget for the coming financial year to Parliament yesterday and announced that for the five-year plan starting in 2020, public spending will rise by 1.2%, following cuts of 1.3% from 2015 to 2019 and 3% prior to that.

As is usually the case, there was praise and condemnation in almost equal measure as the Government and opposition traded blows about just how expansive Philip Hammond had been.

There was, naturally, a footnote the Chancellors plans, that a hard Brexit would require a reassessment of both the budget and the economy.

Many of the plans announced in the Budget came with a “Brexit caveat” attached and for this reason, it was a non-event for the pound which drifted lower on the day with traders awaiting fresh developments on the plans for the UK’s departure from the EU before committing to fresh positions.

Sterling made a low of 1.2791 versus the dollar yesterday, closing just two pips higher while against the single currency it also continued its recent fall closing at 1.1249.

Parliament will debate the budget over the next few days and despite the Government’s lack of a majority it is expected to be passed as the Northern Irish MP’s will support Mrs May as she has so far stood firm over proposals for the Irish border which they have demanded. The Bank of England Monetary Policy Committee will meet on thursday and while the budget will come into their deliberations, no official comment will be made.

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EU rock to depart as Merkel announces retirement

German Chancellor Angela Merkel announced yesterday that she will not stand as Chairman of her Political Party when the elections take place in December and neither will she stand again as Chancellor when her current term expires in 2021.

Merkel has been one of the few constants that have seen the EU mature and grow since the adoption of the euro. She has been Chairman of the CDU for eighteen years and will complete four terms as Chancellor before standing down.

The announcement was hardly unexpected but has been greeted with dismay in Brussels as the EU is pressured from many angles but in Merkel’s view, that is and always will be the case when such disparate nations attempt to come together in a monetary, political and social union.

Following the Bavarian elections a few weeks ago and those in Hesse which took place last weekend which were disastrous for both her Party and its sister, the CSU Mrs Merkel commented that it is now clear that things cannot go on as they are.

She has committed herself to supporting a German for the role of President of the European Commission when Jean-Claude Juncker steps down which has left Bundesbank President Jens Weidmann high and dry in his campaign to follow Mario Draghi as President of the ECB.

Handing both those senior roles to Germans would be unlikely to pass the scrutiny of Brussels and Merkel feels that Germany is better placed to influence the entire region with a German at the helm of the EU.

The euro continues to suffer from the market’s concerns over the Italian budget and the possibility that rising yields on Government bonds will spread to other eurozone nations.

It fell to a low of 1.1360 yesterday and closed at 1.1372.

Trade fears return as Yuan at ten year low

Fears of a renewal of the spat over trade between the U.S. and China rose to the surface again yesterday as the Chinese Yuan reached a ten year low versus the dollar. The current strength of the dollar, the index is trading close to its high for the year, together with the weakening Yuan means that the U.S. Trade deficit is likely to have grown when it is released on Friday.

Turning the trade deficit, which is most of America’s own making, into a political issue has been one of President Trump’s methods of deflecting attention when he is under pressure at home.

With the midterm elections next week, Trump may need a significant deflector if the results are as bad for the Republican Party as are being predicted in some quarters.

While the Federal Reserve continues to react to economic rather than political events and pressures, the dollar is likely to continue to trade higher. With the UK and EU both struggling with their own issues the dollar index is poised to break above the 97.00 level that hasn’t been seen since June last year.

The next ten days or so will provide guidance to the market over how the dollar is likely to perform until the end of the year anj beyond.. With employment data on due Friday, which should see a rebound from September’s weather driven fall, the addition of around 200k new jobs is predicted while the midterms which take place a week from today will fill many column inches for journalists who both support and question the tactics employed by the President.

The dollar index appears to be unable to break the highs made in mid-August without a further event, but with several on the horizon, volatility could be about to climb again.

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.”