Whether the pound will rise or fall on the budget is a good question for such a key economic announcement, particularly with this year’s coming at such a poignant moment.
History will surely judge these ‘interesting’ economic times as the UK narrowly avoids recession but is experiencing record high inflation and serious labour force unrest, as a result of a cost of living crisis which looks likely to be a key factor in the anticipated change at number 10 come the next election.
Expectations can be high for movement on exchange rates around the time of a budget, and of the many column inches often dedicated to the release, there can be a focus on the pound. Historically however, budgets don’t typically see anything too volatile for exchange rates.
This is because much of the news is leaked in advance, and with the changes brought about being fiscal tweaks of tax and expenditure by the government, do little to fundamentally change monetary policy, ie the raising and lowering of interest rates, which would usually have greater bearing on a currency.
Nevertheless, policies which promote or stifle economic growth, in the market’s eyes, can be taken on by investors, and may contribute to some currency movement. Looking at the headlines, Jeremy Hunt could be expected to promote some pro-economic growth measures which in principle might be mildly supportive for sterling exchange rates.
Tomorrow is a key day too because we have the latest Eurozone Interest Rate decision. This might actually carry more influence, certainly on GBPEUR exchange rates. Whilst the predictions of a 0.5% hike from the European Central Bank seem fairly locked on, the potential for volatility and adjustments on such days stems from the ECB Press Conference following the decision.
Market participants will be looking for clues as to future policy decisions ahead, but with the spread between UK and Eurozone interest rates narrowing, as well as US and Eurozone interest rates, there does open up potential for swings on both GBPEUR and also EURUSD exchange rates.
Let us not forget too the significance of the Silicon Valley Bank news this week, what was potentially looking like the beginning of a global run on banks last week has settled now as regulators step in, but reminds us of the sometimes inherent fragility and interconnectedness of financial markets, and how a sense of uncertainty can soon spread and trigger unforeseen consequences and reactions elsewhere.
Our forecast assessments on GBPEUR indicate a mixed range of 1.12-1.15 over the coming months, whilst our GBPUSD analysis shows a slight sterling bias (USD weakness) over the same period.
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