Pound largely unchanged after pre Budget Report

Good Morning. Sterling was mixed yesterday after the pre-budget report. The pound briefly rallied against the euro and the dollar on Wednesday after UK finance minister Alistair Darling said there will be no windfall tax on bank profits, however the lack of any clear direction on our deficit doesn’t bode well. This morning rates are as follows:

  • GBP/EUR 1.1057
  • GBP/USD 1.6254
  • GBP/AUD 1.7789
  • GBP/NZD 2.2364
  • GBP/CAD 1.7187
  • GBP/CHF 1.6727
  • GBP/JPY 143.16
  • GBP/NOK 9.3728
  • GBP/ZAR 12.318
  • EUR/USD 1.4692

Pre Budget Report
We won’t analyse the whole report here, simply cover what it means for exchange rates. For an outline of the key points, the BBC has a clear simply fact sheet.

The only real points that may affect currency were on growth forecasts. Economy forecast to shrink 4.75% in 2009, worse than 3.5% forecast in April. Growth of 1%-1.5% expected in 2010 and 3.5% in 2011 and 2012. It wasn’t made clear how Darling arrived at these figures though, and the IMF and credit agencies have a less rosy view.

The pre-budget report was a bit of a letdown according to most analysts. It was really nothing more than electioneering, with no real news at all. In a foretaste of the looming general election battle, he said the choice was between going for growth or putting the recovery at risk – a choice between “two competing visions”. But he was also forced to admit that the recession in the UK had been worse than he predicted last year. Exchange rates remain largely unchanged, as there was no clear path on how they plan to reduce the deficit, simply stating it would be halved within 4 years.

UK Credit Problems
Britain is still in danger of losing its triple-A credit rating and the Conservatives would make protecting it a priority if elected next year, Shadow Chancellor George Osborne said.

Osbourne said that there was not enough in the pre-budget report to soothe fears that Britain might lose its credit rating. “I don’t think it is a credible plan. Unfortunately, the measures announced yesterday don’t start tackling the deficit until 2014/15 and that is far too late. “The thing I’m aiming for is making sure that Britain keeps its credit rating.”

Osborne also said that although monetary policy was a matter for the Bank of England, it was important to keep interest rates as low as possible for longer. This brings us nicely to the interest rate decision today…

Interest Rate Decision
The Bank of England is expected to announce no change in policy when it reveals the outcome of its most recent meeting later. The Bank is likely to hold interest rates at 0.5% and leave its £200bn asset purchase programme unchanged.

In November, the central bank said that the fragile economy and the risk of inflation falling below its target of 2% had led it to extend its quantitative easing scheme, which runs out in January. But since then, the economic data has been largely positive.

So, it’s likely rates will stay at the record low of 0.5% well into next year. We’re not expecting any more QE, but if there is then the pound will weaken. The main problem for those hoping for a recovery in rates is our low interest rates.

As other economies such as the US and EU start raising their rates as they exit recession, their currency becomes more attractive due to the higher return. As our rates will likely stay lower for longer, the pound will lose out and likely weaken into 2010, before recovering in the Spring, around the General Election.

Other Data
We have the ECB monthly report that contains a detailed analysis of the prevailing economic situation and the risks to price stability. It also provides articles on a wide range of topics related to the tasks of the ECB. If it’s positive, then a strengthening Euro may cause GBP/EUR rates to fall.

There is also jobs data for the US. Positive news from the states could help the pound.

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