Morning Brief – Budget Count Down

Budget Count Down

The Chancellor has brought forward the date upon which he will announce his new budget plan. Now apparently taking a less devolved approach from his previous ‘markets will be markets’ sentiment, the change of date was justified to give some certainty with respect to fiscal policy during this period of turmoil. It seems that the disquiet in foreign exchange, equity and particularly rates markets are finally getting through to Number 10 and 11 Downing Street. This speech will be imperative to calming the treasury and gilt markets and in turn cutting off the destructive feedback loop spilling over to the foreign exchange market.

The Euro was described by a former Tory party leader (at that time leader of the opposition) as a “burning building with no exit”. Many would today argue that the Pound finds itself in need of firefighting, as well as the Euro, whilst fixed income markets weigh upon the currency. The Bank of England as we have written about recently initially provided the dousing of water that an imperilled GBP required. That input was subsequently ramped up in scope to broaden the support that the Bank of England was providing to the markets and its self-confessed fire sale trading dynamics.

This assistance provided by the Bank of England has served to markets to prove that despite the risks facing GBP, with the flames (or rather yields!) licking ever higher, there are in fact exits. Whether or not they exited during the peak of market uncertainty following the mini-budget, the Bank’s firefighting measures have certainly forced some openings. However, those exits may be about to be closed with the Bank of England confirming on Tuesday night that they are not seeking to extend the duration of the emergency intervention in the bond market. The BoE is therefore very much now hoping that the flames have been doused for good before they shut the exits.

Initially, the news drove GBP down sharply overnight with GBPEUR and GBPUSD dropping more than a cent during the US session. However, when the FT broke news that despite the Bank of England Governor Andrew Bailey’s hard stance on Tuesday night there were expectations in the market that policies might be extended, GBP began to recover from its woes. The message from the BOE publicly was clear: if you need help, take it now as this policy support will not last beyond this week. However, the residual expectation that help will be more forthcoming to those who need it beyond this date is certainly holding the doors open for GBP for now.

Discussion and Analysis by Charles Porter

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