Sterling has lost ground in the last 24hrs as investors show a delayed reaction from Wednesday’s Autumn budget.
New UK chancellor Rachel Reeve’s budget delivered massive extra spending plans totalling £70 billion each year. This will be funded by huge tax hikes (circa £40 billion per year, which is the largest in more than 30 years) and increases to borrowing by around £30 billion per year. While markets initially reacted in a relatively relaxed fashion to the budget, gilts (UK government bonds) later started to be sold-off and yields extended their rally yesterday amid widespread concerns over how this may ultimately weigh on UK growth. While the Labour party are claiming this new investment will spur UK growth and restore stability to the economy, markets are sceptical over whether this extra stimulus will be enough to offset the negative impact to household disposable incomes from the tax hikes and higher borrowing costs that are likely to ensue.
In other news, the Euro has strengthened this week by some encouraging economic news out of the region. The latest EU growth report (GDP) showed their economy grew by 0.4% in the three months to September, which was double the 0.2% estimate. Data this week also showed that Eurozone inflation also rebounded off its 3-year lows in October. This has increased expectations that the ECB will take a less aggressive approach to interest rate cuts which has made the Euro more attractive.
As a result, the Pound lost around 1% against both the EUR (mid-Sept low) and USD (mid-Aug low) yesterday but it’s since recovered around a third of this today. Focus today turns to this afternoon’s nonfarm payrolls report (1.30pm), but investors will have at least one eye on next week’s US election, which remains a tough one to call. Trump remains the front runner in the polls and prediction models, but his apparent advantage appears to have waned this week, and markets are back viewing the election as almost akin to a coin-toss.
