Tuesday 2nd December 2014
There are 4 things that generally affect exchange rates like Sterling/Euro, Sterling/Dollar etc. These are: Economic figures such as unemployment numbers, interest rates, Retail sales etc. Then we have natural disasters such as floods, famine and droughts that can affect the economic output of a country and in turn the value of its currency. Thirdly acts of war have an effect as it can drive investment in or out of a country. Lastly there are political events that can affect an economy. A good example of this would be this years Scottish referendum, that caused large fluctuations in the exchange rate. Political instability is the theme of today’s post…
UK Autumn Budget Statement
At 12.30pm tomorrow afternoon (Wed 3rd December 2014) the chancellor George Osborne will deliver his Autumn budget statement, and this has the potential to affect the currency markets and the value of the Pound. In turn, we could see volatility in exchange rates should there be any surprises.
I expect him to outline the various ways in which his economic plan has been working. The rapid growth rate is certain to feature, and he will be keen to highlight the UK’s performance over the past 18 months compared with our neighbours in the Eurozone. He is also likely to talk about borrowing, taxes, spending and growth.
In years gone by the statement has had little to real effect on the currency markets. This is because for the most part it is simply political theatre, more so tomorrow with a general election just around the corner. This year however could be different…
Could the Pound fall following the statement?
Regular readers will know that the Pound rose well through most of 2014, gaining strength on the expectation that interest rates would rise. (Higher interest rates strengthen a currency due to the higher return on offer for investors). In recent months however the Pound has fallen back slightly, due to inflation numbers dictating interest rates will likely remain at record lows well into 2015.
Another thing that has kept the Pound in check recently is the threat of deflation in the Eurozone. The EU is our largest trading partner, and any slowdown there would also dent the UK economy. Indeed, it’s not in the UK’s interest for the Pound to get too strong, as our exports become more expensive for EU buyers.
If Mr. Osborne gives any surprise revisions to UK growth in tomorrow’s statement it could well weaken the Pound and cause exchange rates to fall. He could also use the opportunity to purposefully devalue the Pound, by highlighting the risks of an EU slowdown affecting the UK economy. We could of course see no effect of the statement at all, however there is more potential than normal for his word to affect the Pound.
What else could move rates this week?
After tomorrow, all eyes will turn to Thursday when the UK and EU central banks are both expected to keep interest rates on hold, however statements accompanying the decisions could hint at further stimulus, so I expect a choppy day for Pound/Euro. Mario Draghi, the ECB president could hint at easing which could weaken the Euro. Mark Carney, the UK governor, has been very inconsistent in his views on interest rates, so there is some potential for Thursday to shake up exchange rates.
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