- Pound to Euro exchange rate today (24-11-16): 1.1801, analysts now eyeing September highs
- Euro to Pound Sterling exchange rate today: 0.8477, Euro in the passenger's seat
- Pound to Dollar exchange rate today: 1.2415, USD is best performer of the day
Pound Sterling rose as the UK's Chancellor Philip Hammond announced an increase in spending on those areas of the economy that can help boost productivity.
The Autumn Statement prioritised additional spending on high-value investments, specifically in infrastructure and innovation - exactly the area we believed it would need to be directed were Sterling to get a boost.
On the back of the announcement Sterling managed to secure the mantle of the second-best performing currency in the G10 for the day, coming in second to the Dollar which took a strong bid on the back of better-than-forecast domestic data.
Nevertheless, markets liked the Autumn Statmement.
Announcing his funding plans Hammond told lawmakers, “raising productivity is essential for the high-wage, high skill economy that will deliver higher living standards for working people.
"We can fund this commitment in the short-term through additional borrowing," said Hammond, "the productivity gap is shocking."
A new National Productivity Investment Fund was announced which would be funded to the tune of £23BN.
“A welcome £2bn boost to R&D - innovation funding should be accessible to more SMEs to deliver an economy that works for all,” said the Federation for Small Business in response.
The UK suffers a productivity level lower than that of Italy, France, the USA and Germany, indeed, the country lags that of the rest of the G7 by 18%.
The Bank of England has over recent years said that they would only consider raising interest rates should this productivity gap start coming down.
“We welcome Mr. Hammond’s infrastructure drive to build and improve the UK’s roads, railways and broadband. Investors and businesses alike will benefit from the funding, which will trickle down to surrounding sectors," says Agate Freimane, Senior Investment Director at BrickVest.
There was also a boost to exporters - something desperately required for the UK to close its massive current account deficit which would in turn give Sterling stability over coming months.
The Chancellor announced the Government would be doubling its export finance capacity.
"Today’s announcement supports innovation and ambition and we want to see many more SMEs understanding that new borders are within their reach. The traditional barriers for doing business internationally are quickly abating,” says Kerry Agiasotis, President at Western Union Business Solutions.
No Shock Growth Downgrades or Spending Upgrades
Sterling was also aided by softer-than-expected growth forecast cuts from the Office for Budger Responsibility (OBR) who now see the following:
- 2017 GDP growth 1.4% for 2017, down from a March forecast 2.2%
- 2.2% in 2018
- 2% in 2021
The OBR announced forecasts for much higher borrowing each year this parliament:
- 2016/17: £68.2bn
- 2017/18: £59bn
- 2018/19: £46.5bn
- 2019/20: £21.9bn
- 2020/21: £20.7bn
- 2021/22: £17.2bn
The OBR forecasts debt will peak at 90.2% of GDP in 2017-18 and fall to 89.7% of national income in 2018-19.
Borrowing as a % of GDP will fall to 3.5% in 2016/17.
"The Office for Budget Responsibility’s first definitive forecast of (essentially) the impact of Brexit on economic growth was admittedly at the more pessimistic end of expectations, foreseeing a 2.4% point hit over the entire forecast period," says City Index's Odeluga.
This, coupled with increased gilt issuance should extend the recent rising trend of UK yields over the medium term.
"However, there were no outright negative shocks in the Statement and I would expect UK bond prices to enjoy a little more underlying support in the wake of Hammond’s comments," says Odeluga.
Pound vs Dollar: Where Next?
TD Securities' James Rossiter anticipates further GBP strength, whatever the outcome:
"We think GBPUSD is looking increasingly at risk of a more sustained short squeeze as the “Trumpflation” trade now looks mature. We favour tactical longs in cable with an initial target of 1.2674 against support at 1.2365, but the primary trend remains bearish for sterling overall."
Lloyds Bank's Robin Wilkin is also bullish says he would allow the market to test more meaningful resistance in the $1.28-$1.30 region, while a move back through ~$1.2300 should see a re-test of the range lows.
Strategists at CitiFX say that on the topside, there's still plenty of resistance ahead at 1.2445-50 followed by 1.2510-15, and 1.2600-20 (the level to short) whereas on the downside, support lies at 1.2350-60 followed by 1.2200.
Pound vs Euro: Where Next?
Analyst Viraj Patel at ING says the Autumn Statement consisted of a series of small steps in the right direction, "though we do not see these as having any game-changing implications for our bearish GBP outlook."
However, others see the prospect for the November recovery to extend a little further.
Lloyds Bank’s underlying bias at the moment is for a move towards next resistance in the 1.19-1.2048 region, but Lloyds remain wary that sharp falls can also be seen as we head into and through the Autumn Statement.
Karen Jones at Commerzbank today tells clients the pair may still reach the 50% Fibonacci retracement of the move down that started in May at 1.1972, above which lies the 1.1994 September high.
Jones is looking for some kind of stabilisation to set in over the short-term and any Sterling weakness is expected to be weak.
Our analyst Joaquin Monfort notes GBP/EUR is in an established uptrend and is looking for the pair to grind higher.
A Political Currency
For Sterling, it is all about politics this week.
A strong rally in GBP on Monday November 21 caught traders by surprise as many had been expecting a pedestrian pace into the mid-week Autumn Statement which was supposed to be the focus.
The Prime Minister stole the limelight with her comments delivered to the CBI conference.
PM May suggested there would be no ‘cliffs edge’ when it comes to Brexit which was interpreted as suggesting a traditional period of single-market membership is likely.
Markets like the certainty such a scenario poses and the Pound pushed sharply higher to be the best performing G10 currency for the day confirming sentiment surrounding Brexit still remains important even if the recent move higher in US interest rate yields has been pulling the currency up ever since the Donald Trump victory.
The reaction in Sterling was a bit delayed though; we note that it could have taken some time for a big trader with the ability to materially move the market to wake up to the implications as to what was said.
"Much speculation about why the strong gains overnight with some suggesting it may be due to UK PM May's comment that she will seek a "transitional deal" for Brexit to avoid the "cliff edge" that businesses fear, The gains could however also be on some anticipation of a fiscal boost in the UK Autumn Statement tomorrow," say CitiFX in a foreign exchange briefing to clients ahead of the Autumn Statement.
This reaction to May's comments only serves to remind us how tricky trading a politically-driven currency can be and we urge caution into the the Autumn Statement.