Economic Update
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Hunt's UK Budget Announcement: Potential Catalyst?
6 minute read04 March 2024
GBP
Last week, there was little volatility between the sterling and euro, with the exchange rate range fluctuating just 40 pips (0.4 cents) between its peak and trough. Towards the end of the week, we saw a very gradual decline from the pound, which could point to some potential concerns surrounding the UK budget, which Chancellor Jeremy Hunt will announce on Wednesday.
There are currently mixed views from commentators on whether tax cuts would be the right course of action, considering the UK is in a mild recession. However, the Conservative opinion polls are currently very low, trailing Labour by 19 points. Tory leaders will be looking to give voters a reason to reinstate them ahead of the competitive Labour opposition.
Whilst the general election is likely to be held in the second half of the year, political uncertainty for the pound could happen well ahead of this event.
With no other market data set to be released for the UK this week, sterling must hope for a positive outcome from Jeremy Hunt’s budget to keep the pound buoyant.
EUR
A few data events for the EU could generate some market movement for the single currency this week after a somewhat quiet spell. The first significant economic data release will come on Wednesday, when European retail sales are expected to show some recovery, with the month-on-month reading forecast to increase from a previous -1.1% and record 0.1%.
This week's most important event for the euro will be Thursday with the European Central Bank (ECB) interest rate decision, where the refinancing rate is forecast to remain unchanged at 4.5% for the fourth time. President of the ECB, Christine Lagarde, will speak later in the afternoon about the region's economic growth plans and the current view on interest rate cuts.
The narrative could develop a less hawkish tone after recent inflation data released from the major EU economies showed its decline was continuing. The preliminary estimations for February’s monthly inflation data in the Eurozone also showed continued deceleration, with inflation falling from 2.8% to 2.6%. Markets will be on the lookout for any clues about when to expect the first rate cut, which isn’t currently expected before June.
To end the week, we'll see the year-on-year European GDP data released for Q4 on Friday. Growth in the EU is expected to remain unchanged at 0.1%. Although this shows stagnant growth across the region, it could still impact GBP/EUR, as it would still reflect a more positive performance than the UK's shallow negative growth last quarter. GBP/USD has gradually improved over the last few weeks, but last week saw a significant decline. The pair peaked at 1.27 on Monday only to drop a cent to a low of 1.26 mid-week. The potential market direction this week remains unclear due to a mixed bag of US data releases. On Tuesday, the ISM Services PMI will be released, with markets expecting the metric to drop from 53.4 last month, to 53. Even though this is a slight drop, it is still above the key 50 threshold, which indicates industry expansion and could contribute to dollar strength because of its ongoing positive implications on business confidence. On Wednesday, the ADP Non-Farm Employment Change will also be released, which is expected to show the change in the number of employed people, excluding the farming industry and government, increasing from 107k to 150k in February. However, Friday's Non-Farm Employment Change, which excludes the farming industry, is expected to drop significantly on the previous month, declining from 353k to 200k. The ADP Non-Farm Employment Change is released by Automatic Data Processing Inc (ADP) and is designed to mimic the Bureau of Labor Statistics data that is usually released two days later. The major difference in the metrics is that ADP data doesn't include government workers. The Federal Reserve’s Chair Jerome Powell is also due to testify before the House and Senate committees this week when he is due to discuss inflation and potential risks to US banks. If Powell takes a more hawkish line than expected, it could interrupt the dollar strength we’ve seen so far this year. Markets currently expect the first of three rate cuts this year to come in June or July. USD
This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.
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