Will the ‘mini’ budget deliver maximum benefits?

Today’s UK Spring ‘mini’ Budget Statement gives Rishi Sunak the chance to offer some much-needed relief to the beleaguered UK consumer. Here’s hoping, as he has about £30bn more cash to play with after a combination of higher tax receipts and lower than expected public borrowing, since the last forecasts were set by the government during the October Budget. Granted, there remains much uncertainty both in the UK and globally, so a measured approach looks the order of the day. However, the fact that improvements in borrowing costs should run into next year, will make the calls for Rishi to be more cautious harder to convince.

Stronger tax revenues. Where did they come from?

A combination of rising consumer spending – pushing up VAT revenues and the surge in employment have been the main drivers helping the government coffers here. Government debt interest was up £2.8bn (at £8.2bn), and this is an area of potential concern, given that the BoE have now raised UK interest rates three times, so that figure could become more painful. Maybe that is why we got that dovish hike from the BoE last week. Partially impartial.

Where will we all feel the love then?

Most likely in a reduction on government fuel duty tax, broader energy cost help and the chance that the previously planned tax rises, such as in National insurance, get kicked down the road. The latest UK Inflation print has just been released this morning, and has jumped to 6.2% (YoY), versus 5.9% expected. The Retail Price Index climbed to 8.2%, versus a jump of 7.8% expected. Sobering reminders that the cost of living crisis is likely to be here with us for some time yet, even if Rishi does manage to deliver on the day.

What about the pound?

Well, the pound enters the business end to the week in fairly fine fettle. GBP/USD broke above its two-week top, moving back above the 1.3250 region. The 1.3300 level has capped the upside potential for the time being. The move was more to do with an increase in broader risk appetite, but the single currency did not follow suit with quite the same gusto, and EUR/USD struggled to make any real headway beyond 1.1000.

What about the dollar?

Bit of a mix-bag for the greenback really. USD/JPY continues to break new ground after reaching an impressive six-year high yesterday. After breaking over 120.00, the pair has since moved to a 121.50 top. That move looks to be down to that ever-increasing interest rate differential between the U.S and Japan. With the Fed set to hike rates by at least 0.25% at every meeting this year, and the BoJ seemingly unconvinced on the increasing Japanese inflation, it makes sense that the divergence between the USD and JPY has accelerated. Indeed, the BoJ recently kept its policy measures unchanged, and downgraded the view on the economy due to the impact from COVID, at their latest meeting. 

However, the broader dollar index (DXY) was flat on the day, and those Powell-led gains have come to an abrupt stop, for now at least. After an eternal two-day hiatus, Powell is due to speak again today. We’ve missed you, Jay! I am fairly comfortable that there will not be too much ‘new’ news, given the small time gap between speeches.