MENU

Pound Sterling Holds Gains vs. Euro and Dollar after Sunak Announces Incentive to Get People Back to Work

- GBP holds gains following spending and tax update
- Initiative to get people back into work announced
- VAT cut to help hospitality industry announced

Sunak

Above: File image of Chancellor Rishi Sunak. Image © HM Treasury, Gov.uk

No commissionAchieve up to 3-5% more currency for your money transfers. Beat your bank's rate by using a specialist FX provider: find out how.

The British Pound held onto sharp gains registered over the course of the past 24 hours following the Treasury's Summer Economic Update where it was announced the Government would pay employers £1000 for every worker who returns to their job after the furlough scheme expires at the end of October.

The plan was the flagship announcement amongst a set of new initiatives designed by the government to protect the economy in the wake of the covid-19 pandemic, and for Pound Sterling there was a danger the Government would disappoint.

The Pound had rallied sharply into the Update and analysts said that any disappointment could see those gains reversed, but it appears that what was announced is broadly consistent with market expectations meaning recent advances should be held. The Update comes in the wake of a sharp rally in the value of Sterling, which as we note here, looks to be a result of further hints that the EU and UK are likely to reach a some kind of trade deal by the end of October, if not before.

"At first glance the market reaction has been positive, with Sterling rallying against the Dollar and the Euro, investors evidently deciding an activist government with money to spend is better than one looking to save money at the risk of an even deeper recession," says Chris Beauchamp, Chief Market Analyst at IG.

In addition to the employer incentive the government announced a £2BN fund to create six-month work placement jobs for unemployed 16-24 year-olds with a view to stemming unemployment levels in this vulnerable age bracket.

"I want every person in this House and in the country to know that I will never accept unemployment as an unavoidable outcome," Chancellor Rishi Sunak told Parliament as he delivered the Update.

VAT is meanwhile cut from 25% to 5% for the hospitality and tourism industry in a move designed to get consumers spending again in what has been a particularly hard-hit sector, while the property market will benefit from a move to raise the Stamp Duty threshold to £500k.

With foreign exchange markets having had time to digest the announcements we see the Pound-to-Euro exchange rate is quoted at 1.1117 while the Pound-to-Dollar exchange rate is quoted at 1.2554 which is broadly consistent with the day's opening levels.

While the Government appears to have done enough to not disappoint, it has not necessarily done enough to boost Sterling to fresh multi-week highs as financial markets appear to have wanted more generosity.

"Not enough to underpin a V-shaped recovery," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics. "In total, the fiscal package could lead to a cash injection of £30B, or about 1.5% of annual GDP, though much will depend on how many firms bring back furloughed workers. Note that this fiscal support is spread out over the next three quarters. It will not, therefore, fully fill the void when the CJRS and Self-Employed Income Support Scheme end at the start of November."

GBPEUR download banner

Heading into the Update market expectations for any sizeable stimulus from the Treasury were low given the underwhelming nature of Prime Minister Boris Johnson's 'New Deal' announcement in the previous week that contained nothing new and instead detailed how existing spending plans would merely be brought forward.

"Financial markets have become accustomed to big market-moving announcements from Sunak since the COVID-19 pandemic hit the UK," says Kallum Pickering, Senior Economist with Berenberg Bank. "With help from the BoE, the decisive and broad actions taken by HM Treasury, such as the CJRS (Corona Virus Job Retention Scheme), have prevented an inevitable recession from developing into a financial crisis and depression."

There was a concern that the Treasury's spending on the jobs retention scheme leaves the fiscal armoury somewhat depleted and that the ability to announce sizeable additional measures is limited.

The cost of the furlough scheme is approximately costing the Treasury £14BN per month, which if continued at the same rate will total £69BN by October.

Despite the cost of the furlough scheme it must be noted that the Government is not yet being restrained by the markets and is able to borrow at record lows with yield paid on some short-term government debt even falling to below 0%.

UK cost of borrowing

"Despite the surge in public debt, the government’s 10-year borrowing costs are hovering at near-record lows of 0.2%. The low rates on government debt in the UK and across the advanced world are being driven much more by economic fundamentals – such as low inflation expectations and a glut of global savings - than the pace at which governments are increasing the supply of bonds on the open market. As the aggressive fiscal measures help to preserve the economy’s underlying potential and long-run capacity to generate tax revenues, the risks from the massive temporary debt surge are lower than they may initially appear," says Pickering.

The UK is issuing debt to finance its response to the crisis at a record pace, with the UK Debt Management Office (DMO) showing that the value of government bonds issued averaged around £60BN per month from April to June, which Pickering says is an increase from an average of around £13BN per month in the six months to March and more than double the peak rate of issuance during the financial crisis.


BannerAchieve 3-5% More Currency: The Global Reach Best Exchange Rate Guarantee maximises your currency purchasing power. Find out more.

 

BannerBrexit will impact your UK pension if you are living in the EU. Capital Rock Wealth have developed a comprehensive guide to help you navigate the uncertainty ahead.
Find out more

 

BannerInvest in Spanish Property. A selection of discounted properties due to the covid-19 crisis, online viewings and transactions possible. Download the guide. Download the Guide

GBPEUR download banner

Featured Content

Spanish Mortgage Specialists Mortgage Direct Secure Spanish Licence

Mortgage Direct - a Spanish mortgage broker specialising in the provision of mortgages for expats - have confirmed they have secured their Spanish license.