A no-thrills affair

A no-thrills affair

Yesterday, UK Chancellor John Healey delivered his first budget to Parliament. The Chancellor’s predecessors had learned their lessons the hard way by leaking sensitive policy changes to the press prior to announcing them in the Commons. Perhaps usurpingly therefore, much of the content of the budget was unknown prior to delivery at the dispatch box. Despite lacking the details moving into the event, the market had undoubtedly positioned for a non-event. Ultimately, that’s what they got with a cut-back low-thrills cautious budget.

For those interested in UK fiscal policy, there were some interesting elements. Some cost-of-living measures, including an energy price subsidy, were announced that are set to cost a pretty penny (409 billion pennies to be precise). Those are offset by the bank surcharge being hiked to 6% from 3%, and some changes to the triple lock. What really matters for markets was that the OBR, the UK’s fiscal watchdog, published UK fiscal headroom at £15bn versus £15.2 estimate.

0.2 of a billion pounds is non-negligible. However, gilts took the figure in their stride with some risk premium being priced out of contracts further along the UK yield curve. Sterling remained largely unchanged on the day with a minor bid into the close which should be attributed, as much as anything, to European traders reducing exposure to the US Dollar ahead of the Fed’s central bank decision overnight. FX swaps/forwards reflect a considerably lower premium in favour of Sterling as a result of the passing of yesterday’s budget event. However, just as options pricing had predicted before the move, the Pound was unable to break into fresh territory.

Discussion and Analysis by Charles Porter

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