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Pound Sterling: Forget Trade Talks, it's the Budget that will Deliver the Next Big Moves vs. the Euro and Dollar says Swiss Bank

- Surge in Govt. spending to be announced in March

- Private spending also showing tentative signs of picking up

- Trade talks unlikely to bother GBP until second half of 2020

Pound Sterling outlook

Above: File image of Sajid Javid © Gov.uk, Foreign and Commonwealth Office.

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Foreign exchange analysts at Credit Suisse say those watching and waiting for EU-UK trade negotiations to move the Pound will have to wait a long time, as there simply won't be enough developments on the matter to bother Sterling for some time to come.

Instead, analyst Shahab Jalinoos at Credit Suisse in Zurich says the big ticket event for the Pound in the first three months of 2020 will come in the form of the government's budget announcement.

In a note to clients issued this week, Jalinoos says Q1 does not present opportunities to gauge how well UK – EU trade talks were proceeding, "limiting scope for a major move".

"What is on the table in Q1 is the government's budget date of 11 March, which was confirmed this week. The government has promised to continue targeting a balanced current budget within 2020. But it has promised to raise capital spending from 2 to 3% of GDP, allowing an extra GBP 100BN of investment over 5 years, of which GBP 80BN has yet to be allocated," says Jalinoos.

Jalinoos says that the kind of spending envisaged by the Government would take public sector gross investment to levels not seen on a sustained basis since the early 1980s, "and is expected to be concentrated on "levelling up" growth between the high-performance south-east and the rest of the country".

Chancellor of the Exchequer Sajid Javid on Tuesday, January 07 said the budget would take place on March 11, and he told the BBC, "there will be an infrastructure revolution in our great country. We set out in our manifesto during the election how we can afford to invest more and take advantage of the record low interest rates that we are seeing, but do it in a responsible way."

"While this news in not entirely new, we suspect the anticipation of this budget will keep GBP supported, especially as there will likely be a drip feed of likely proposals released on a regular basis in the weeks ahead," says Jalinoos.

A surge in Government spending should underpin economic activity just as private investment is being tipped to pick up in volume. Signs of a thawing in frozen investment plans have become evident now that the UK's uncertain political situation has been resolved by the strong majority secured by Prime Minister Boris Johnson in the December election.

Last week we saw the first hints that investor sentiment might be on the up: the December Services PMI out on January 07 showed firms reported a notable increase in confidence following the General Election outcome.

And, Halifax price data out on January 08 showed house prices posted their strongest monthly increase in nearly 13 years in December with a +1.7% month-on-month, taking the year-on-year increase to 4%. "Last month’s election helped to reignite the smouldering embers of an otherwise weary property market. Not only is this boost immediately evident within December’s monthly and annual top line growth, but those of us on the front line also enjoyed an almost immediate uplift in buyer interest and commitment to transactions," says Marc von Grundherr, Director of Benham and Reeves.

A combination of stronger government spending and private investment could well collude to push UK growth rates higher, which will in turn prove to be a positive force for Sterling.

Analyst Jordan Rochester at Nomura, the global investment bank, says the Pound should drift higher in 2020 as "bad news is in the price but greenshoots in the data" are expected to emerge. "Profit-taking and Brexit realism quickly settled in," says Rochester. "But knee-jerk moves and profit-taking aside, the trend in 2020 remains for a drift higher."

The analyst says Brexit is to be more of a concern not now but in the second half of the year, and there should be five drivers that back his thesis for a stronger Sterling, one of which is increased Government spending.

"The fiscal impulse in March to capture the market’s attention. With monetary policy in many developed economies having almost exhausted its potential to support respective economies, attention is increasingly shifting towards fiscal settings. And in the UK this is particularly true with the Budget long overdue (delayed because of the election) and the Conservative government promising a significant uplift in its spending ambitions," says Rochester.

Investment spending is expected to be lifted significantly from around 2% to 3% of GDP, "we expect a sizeable loosening in fiscal policy at March’s Budget, focused on investment spending and an associated increase in gilt issuance," says Rochester.

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