Caxton FX Currency Blog

As the Chancellor of the Exchequer, Alistair Darling, gave one of the gloomiest budgets in recent memory, the pound lost value against most major currencies, falling by nearly two cents against the euro. The Chancellor confirmed that public borrowing would total £175bn in 2009-10, or 12.4% of GDP. The budget is not expected to return to balance until 2017-18. In addition to the dire state of public finances, the Chancellor confirmed that the UK’s economy is set to contract by 3.5% this year – three times worse than what was forecast just 5 months ago – with a forecast for growth in the economy next year of 1.25%. The growth figure for 2010 seems to be bullish, especially when you consider that the International Monetary Fund is forecasting the economy to contract by 4.1% this year, and that the UK’s economy will continue to contract next year by 0.4%. It was also announced that there would be tax hikes, including a new 50% rate of earnings above £150,000, prompting fears of a brain drain out of the UK similar to what was witnessed in the 1970s. Investors reacted to the budget by selling the pound, with sterling falling a cent and a half by the time Alistair Darling had finished speaking.

In other news yesterday, it was revealed that the number of Britons claiming jobless benefits rose in March by 73,000 people, with unemployment rising to 6.7%. The Bank of England Minutes did not spring any surprises, as the votes to keep interest rates on hold at 0.5% and to continue with its quantitative easing plan were unanimous.

In early trading today the pound is bouncing off the lows set yesterday against the single currency, as the Caxton FX analysts suggest there was a slight overreaction to the budget yesterday and we may see a bounce today as investors pick up sterling at lower levels. There is little data out of the UK today, with just the Confederation of British Industry releasing their industrial trends survey. Within the eurozone, industrial new orders, and PMI services and manufacturing data will be of note for investors.