One down, two to go
Markets took the UK budget in their stride yesterday. Moderate GBP buying left major crosses in a largely healthy state during the afternoon session. Amongst the G10 FX space, when measured against the US Dollar, the Pound has been the best performing currency so far this year. Of course, reversing that analysis and looking at the Dollar itself versus this basket of currencies reveals the greenback so far holds top spot amongst the major currency movers so far this year.
GBP, sitting atop of this lofty perch, therefore arguably had a lot to lose from yesterday’s budget. Despite being more mindful of the requirement to present the budget to parliamentary before disclosing it to the public, the main elements of the budget had largely been leaked prior to Hunt’s delivery. The headline cut to National Insurance was the key policy feature and had been all but written in stone by the time Hunt took to the dispatch box. Nonetheless the forecasts presented and fiscal pledges made left markets with little doubt that the last hop of this government will be fiscally sustainable. We therefore saw no such market meltdown within any asset class during or after the statement.
What did manage to move markets and threatened to strip USD of its title as the best performing major currency in 2024 was Fed Chair Jay Powell’s testimony to the Financial Services Committee. The Chair gave away two pieces of market critical information despite remaining familiarly tight lipped on the roadmap of interest rate cuts. Firstly, the chair gave into the demands of major bank CEOs, reducing excessive capital controls. In theory this makes lending more abundant easing financial conditions. Secondly, at least as far as the market determined, Powell placed a greater emphasis than usual on the role of the labour market in determining the timing of interest rate cuts. Given the strong non-farm payrolls performance so far this year, the market took this as a signal that cuts may be closer than they thought, selling USD to push EURUSD higher. With the UK budget statement behind us, today’s ECB decision and tomorrow’s US data readings remain on the docket.
Discussion and Analysis by Charles Porter
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