How will the 2012 Budget affect exchange rates

Wednesday 21st March 2012
Good morning. It’s budget day – so today we will look at how will the UK 2012 budget affect exchange rates, and the implication for the Pound Sterling Forecast and Euro Rate Forecast. It’s been the usual story for Sterling so far this week. On Monday we hit a high of €1.2071, however as has often been the cast in the last few months, the highs were not to last, and yesterday the Pound fell back against most currencies, as the chart below shows.

~Currency Movements on Tuesday 20th March 2012~

Sterling falls against Euro ahead of Budget

The Pound fell against the Euro yesterday after UK inflation fell to the lowest in over a year. This means interest rates are likely to stay on hold for the foreseeable future, slightly weakening Sterling.

The UK Currency has had a good run in the last few days, after being underpinned by a recent run of better data. According to Reuters Sterling rose to a 13-month peak against a trade-weighted basket of currencies on Monday. Analysts expect it to extend gains if there are more signs of economic improvement, while some expect it could benefit from the UK’s annual budget on Wednesday.

Budget Today

Today the chancellor will announce the latest budget. As ever, the BBC has an excellent outline of what to expect on their 2012 Budget page. Much of it will not affect the currency markets, but undoubtedly there will be financial aspects of it that will. The key points of the budget that might affect Sterling are likely to be as follows:

  • The government’s basic economic strategy will not change
  • The basic economic numbers will not change
  • This will be a fiscally neutral budget
  • A note of caution on income tax
  • The European debt crisis

In a nutshell, it’s all to do with investor confidence. If the budget outlines plans that look good and make the UK an attractive place to invest, the Pound may make some gains. If there are no surprises in the budget, and there is nothing there that changes anything, we could see the Pound fall slightly.

Some analysts say sterling could gain a boost if UK finance minister George Osborne announces some measures to support growth in a fiscally neutral budget, still leaving the country on course to reduce a hefty deficit.

“The expectations are for the Chancellor of Exchequer (finance minister) to announce lower tax rates, more generous tax allowances which together with the credit easing scheme announced yesterday should stimulate domestic demand and thus boost growth,” Citi analysts said in a note to clients.

But they warned that key to whether sterling can sustain a bounce will be the response of ratings agencies, which may express concern if the budget focuses too much on growth-boosting measures at the expense of deficit reduction efforts.

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BoE minutes at 09:30am

Today we will also see the latest Bank of England minutes, showing the discussions and vote split to their recent decision to hold interest rates and QE. These minutes often have a big impact on Sterling, although today they may be overshadowed by the budget.

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