What to take from Chancellor Osborne’s Autumn Statement

This morning the Chancellor George Osborne presented his Autumn statement and emphasised that the “economic plan is working but the job is not done”. The chancellor highlighted the impressive improvements in growth, unemployment, inflation pressures and forecasts which suggest these developments will continue. The key points are below:

UK Growth

• The Office of Budget Responsibility (OBR) now project growth this year will be 1.4%, raised from an expected 0.6% in March. 
• Next year’s forecast has also been revised upwards to 2.4% from 1.8%, with the following four years growth expected to be 2.2%, 2.6% 2.7% and 2.7%. 
• The OBR have shed light on the risks to growth, claiming the eurozone will shrink 0.4% this year. 
• Unemployment is expected to fall to 7% in 2015 and 5.6% by 2018, with an expected 400k additional jobs. 
• Private sector job creation will reach 3.1m by 2019 according to estimates. 

Public Finances 

• OBR have revised underlying public sector net borrowing down to 6.8% down from 7.5%, dropping to 5.6% next year, and predicts a small budget surplus by 2018. 
• The Borrowing forecast is down by £73bn in the next few years, with an estimated £111bn being borrowed this year and £96bn next year. 
• The chancellor has introduced a cap on welfare spending, however this excludes pensions. 
• There will be an updated charter of budget responsibility to be presented to the parliament next year. 
• Pensions will rise by £2.95 a week from next April, and the state pension age will rise to 68 in the mid-2030s, up to 69 in the mid-2040s. 

Taxes

• From 2015 capital gains tax on home purchases/sales from non-residence will be introduced. 
• The Bank Levy will increase to 0.156%, raising an additional £2.7bn next year and £2.9bn a year for 2015-16. 
• There will be further tax breaks for shale gas, with the tax rate being halved on early profits. 
• Up to £1000 tax allowance will be transferable between married couples. 
• Jobs tax to be abolished for people aged under 21. 

Businesses

• Rate relief scheme for small business will be extended for another year. 
• There will be a cap increase on business rates at 2% from next year. 

Living standards

• The freeze on fuel duty will continue, meaning next year’s planned rise will be cancelled. 
• Green levies on energy bills will be rolled back, therefore cutting £50 from bill increases. 
• Average rail prices will be kept constant in real terms.

Sasha Nugent

Currency Analyst

Caxton FX

MPC member’s comments turn sterling to the downside

MPC newcomer Martin Weale said in an interview in the Times that the UK faces a ‘real risk’ of a double dip recession. Although this sentiment is nothing new after the BoE’s re-alignment of growth expectation earlier this month, its reiteration, thin summer trading volumes and the markets hunger for safe-haven investment have sent sterling down against most of its peers.


Recently, the demand for ‘refuge’ currencies has brought the pound down from a nine month high against the greenback, with the price now back down at $1.54 and talk in the market that this bear run could take it as low as $1.50. Although sterling fell against the single currency today, we expect the UK currency to return to €1.53 in the near term as the eurozone’s debt crisis comes back into focus.

If the euro is in such a mess, why is sterling not stronger?

With the headlines from the eurozone going from bad to worse and confidence in the euro nearing rock bottom, the logic would be that the pound in our pockets should be worth more. Caxton FX explains why this is not the case.

Since early March, sterling has moved from below €1.10 to high of €1.1880 hit on May 17th, but has stopped gaining at that point. We have seen the price consolidate its position between €1.16 and €1.17 in the past couple of weeks and, in the short term at least, it looks set to remain in that range.

There are number of reasons accounting for sterling’s comparative weakness, perhaps the most predominant of which is Britain’s exposure to the eurozone.

Duncan Higgins, senior analyst at Caxton FX explains, “The eurozone comprises Britain’s largest trading partner and a deepening of the crisis could quickly sap demand for UK exports. Inevitably then, our interests are similarly aligned as a strong recovery in Europe should have a positive impact on the British economy.”

Concerns about the banking crisis in the eurozone are also weighing on the pound.

“The FTSE’s recent declines have been led by the banking sector, with fears growing about the level of exposure that UK banks have to the troubles in Southern Europe. Although CajaSur is a comparatively small bank, there are risks that Spain would have to step in to salvage more banks as the price of interbank borrowing is beginning to soar,” says Higgins.

Adding to the pounds already heavy load is the government’s proposed action toward the deficit. This has impacted negatively on sterling.

Higgins says, “Although the market is in approval of the government’s budget cutting policies, there are risks that these could undermine the strength of the recovery. Monetary policy will likely be kept loose longer than was initially expected to accommodate these cutbacks, which provides another drag on the currency.”

The pound, particularly in this current climate, is still considered a “risky” asset. With risk aversion as high as it is, it is really only the US dollar and Japanese yen that are is a strong position.

“Whilst the pound continues to be sold in favour of safer currencies, this will weigh sterling’s movement against the euro. With markets remaining as jittery as they are, it is unlikely that we will see sterling break out of its current range against the euro in the short term,” concludes Higgins.

UK inflation hits its highest level in 18-months

The rate of inflation in Britain rose again last month and now stands at its highest level since November 2008.

Standing at 3.7%, up from March’s figure of 3.4%, the data once again beat expectations. However, even a leap of this extent will have little impact on the markets with investors heavily focused on the government’s upcoming budget proposals. The market is also expecting little change in rhetoric from the Bank of England, which recently in its quarterly report maintained its line that inflation will head back towards the 2.0% target in the coming months.

Duncan Higgins, senior analyst at Caxton FX comments, “The Bank’s policy has for some time now been that the prevailing degree of spare capacity in the market should start to push headline inflation sharply lower. At present the rate of increase is showing little sign of slowing. Certain policymakers have already voiced their concern about these upward pressures and April’s figure could bring more people into their school of thought.”

Sterling’s comparative weakness, which raises the price of imports, is serving to offset the cheaper value of British exports. There are also fears that should the government choose to raise VAT, which Cameron has refused to rule out, inflation may remain on its current course.

“Although at present the Bank believes that the downside pressures on inflation are stronger, there are clearly still significant risks to the upside. In his budget should Osborne outline plans to raise VAT, inflation could take significantly more time to drop back down. In this scenario, the Bank could come under increasing pressure to raise interest rates in order to curb rising prices,” continues Higgins.

Taking its lead from sovereign debt concerns, sterling is lower again this morning, trading around 1.1650 against the euro and 1.4450 against the dollar.

ConDem Nation sees sterling rise

The currency market has been stuck in limbo over the past few days, following the indecisive nature of the electoral result.

Trading has been extremely volatile, with investors reacting to the news as it breaks from Westminster. The political scene as it stands has come as a positive for both the UK gilt market and the currency, with a substantial part of uncertainty now removed.

Duncan Higgins, senior analyst at Caxton FX comments, “The market’s leading concern is Britain’s fiscal predicament and how the incoming government chooses to address it. From the market’s perspective, the Liberals concession on the timing of cutbacks has been particularly positive. The view now is that a coalition between the Conservatives and Lib Dems should still have the strength to enforce the necessary measures to bring Britain’s finances back under control.”

Sterling rallied across the board yesterday following the news and is continuing to edge higher this morning. However, just as one period of uncertainty comes to a close, speculation builds on just how the coalition will work in practice.

“In theory, Cameron’s entrance into Number 10 will have calmed markets for the moment. However, building a stable coalition is going to be a tall task and there is already severe dissent being voiced on both sides about the concessions being made to accommodate the other. The situation remains on a knife edge, and sterling is certainly still liable to pull back should problems arise,” continues Higgins.

The other major factor buoying sterling is the fragility of the situation in the eurozone. The recent bailout failed to allay fears, and the euro’s status as a reserve currency is coming increasingly under threat. At present sterling is holding around the 1.18 level.

Duncan Higgins adds, “Providing there are no nasty surprises from Westminster in the coming weeks, we could see sterling back above €1.20 by June."

Hung parliament sends sterling to gallows

After months of speculation, it appears that the pollsters have called it and the UK looks set for a hung parliament.

As the results have trickled in the Conservatives, as was expected, have got the majority vote and leading number of seats. However, they are certainly going to fall short of the 326 needed to form a majority and the markets have reacted accordingly. Sterling has slipped sharply across the board this morning, down over a percent against nearly all the majors.

Duncan Higgins, senior analyst at Caxton FX comments, “The political wrangling will begin in earnest next week, and credible signs of a working government could still be days, or even weeks away. In that time it is unlikely that we will see much reprieve for sterling. The fact that the markets have been pricing in a hung parliament scenario for some time now has almost certainly prevented the pound from sliding further against the euro.”

“The uncertainty surrounding the next government has simply compounded pressure on sterling, and against the dollar it is continuing to drop. With the ongoing crisis in the eurozone and its longer-term ramifications also in focus, we are not too optimistic about sterling’s short term prospects,” continues Higgins.

Sterling is currently trading just above 1.15 against the euro and it could begin to bounce back in the latter parts of next week should the coalition talks prove fruitful. Against the US currency, the pound is now nearing $1.46 and there could be further mileage in this drop should the US release positive job numbers today.

Weak GDP figures halt sterling’s rally

This morning’s long awaited GDP figure has revealed that the UK economy only grew by 0.2% in the first three months of 2010.

Even though the percentage shows a continued move away from recession, market consensus was that GDP would be 0.4%. The pound slipped back half a cent against the euro in the immediate aftermath, falling from this morning’s high above 1.16.

Duncan Higgins, senior analyst at Caxton FX commented, “Market data this week has been encouraging for the UK and so this figure will certainly come as a disappointment. It also reveals that the economic recovery has slowed since the last quarter of 2009 when the economy grew by 0.4%. There may be revisions, but it is clear that Britain’s recovery is still set to be protracted, significantly lagging other G7 economies. ”

The data could also have a notable impact on the upcoming election, with each party looking to benefit.

“It works in favour of the Conservatives who can highlight the continued weakness of the recovery under a Labour government. However, Brown may try and work it to his advantage, emphasising the danger of implementing spending cuts before the recovery is fully cemented,” explains Higgins.

The market has understandably taken sterling lower in the wake of the release. However, movement has not been significant since the market may be anticipating an upward revision. The estimate of economic growth in the fourth quarter of 2009 was revised up from 0.1% to 0.4%.

Duncan Higgins adds, “Given the run against the euro this week, there was always a risk that a weak GDP would trigger profit taking. However, with the situation in Greece growing ever more precarious, the pound is unlikely to slip sharply in the near term.”

The pound is currently holding above €1.15 against the euro. Latest reports suggest that Greece will request activation of the EU/IMF package later today, which may offer slender support. Against the US dollar, the pound is not dropping sharply, with the price holding in the mid 1.53s.

Sterling gains after public borrowing figures exceed forecasts

Although official figures confirmed the 2009/10 fiscal year as the worst since records began, sterling has held onto this morning’s gains.

Data released earlier, revealed that the government borrowed a further £23.5 billion in March, beating market forecasts of £24.1 billion. This translates to government net borrowing for the year at a record high of £163.4 billion. However, this falls below the amount that Alistair Darling predicted in his pre Budget report, giving Labour a lift after yesterday showed a rise in unemployment.

UK retail sales were also released this morning, posting an increase of 0.4% in March, below market consensus, which called for a rise of 0.7% on the month. Although this was disappointing, February’s figure was revised up by 0.4%, offsetting the negative sentiment.

Duncan Higgins, senior analyst at Caxton FX says, “The pound has managed to hold its ground this morning despite the weak borrowing figures. The market has taken the broader view that the government’s book is not in as quite a dire state as the pre Budget Report had us believe.”

The reaction to the poor retails sales has been relatively muted with the market focused on the UK’s first quarter economic growth due tomorrow morning.

“The data is expected to show that the economy grew by 0.4% in the three months through March. The risks look to be on the upside, with a string of strong figures from the UK buoying expectations. At present the market appears to have sidelined election worries, and should GDP fall in line with forecasts we could see sterling reach higher,” continues Higgins.

Currently the pound is consolidating above 1.15 against the euro and 1.54 against the dollar, though its upward climb has slowed.

Positive UK jobless figures buoys sterling’s recent rally

There has been more positive data from the UK this morning with the UK claimant count falling by 32,900 in March.

The forecast amongst experts was for a drop of just 7,500. The claimant count measure of unemployment for February was also revised. This showed 40,100 fewer people claiming, against an original reading of 32,500. Putting a slight dent on the figures, the overall rate of unemployment actually rose back to 8.0%, having held at 7.8% for the past three months.

The data has given sterling another boost this morning and it is currently trading around half cent up on the day against both the euro and the US dollar.

Duncan Higgins, senior analyst at Caxton FX comments, “Sterling is currently enjoying a positive run and the surprisingly steep fall in the number of Britons claiming benefit has further improved sentiment. Importantly, the figures raise expectations for a strong reading of economic growth in the first quarter, with all eyes on this data due Friday.”

“The employment data is important not only for the economy but also for its political ramifications. Recent polls have showed the Conservatives edging ahead once again, though this run of positive numbers from the UK could play into Labour’s hands,” continues Higgins

Duncan Higgins adds, “Should the data this week continue to point to an improving rate of recovery in the UK, we could see sterling near €1.16 and $1.55 by the week end.”

The minutes from the Bank of England latest policy meeting were also released this morning. As expected they revealed a unanimous decision among the members to keep policy unchanged. All members agreed that the events of the past month had not been sufficient enough to substantially alter their views of the medium-term outlook for inflation and activity.

Sterling hampered by political uncertainty

Growing concern over the UK’s political situation is taking its toll on the pound. Together with the inevitable check-back as traders book profits from its sharp rally over the last ten days, the resignation of several senior politicians this week has rocked investor confidence. The latest, work and pensions secretary James Purnell, who quit last night, is the first to openly call for Prime Minister Gordon Brown to stand aside. The results from yesterday’s local and European elections are expected to be very poor from Labour’s point of view. If they are, this will only exacerbate the situation. Political uncertainty is rarely good for the local currency as it almost always gives investors jitters about investing in the UK before the situation is resolved.