As we headed into Osborne’s 8th major Budget announcement the currency markets sat up and took notice. The cable (GBP/USD pair) which was already under pressure leading into the budget on fears of a Brexit, looked even more bearish minutes before the announcement. With expectations that Chancellor Osborne will set out £4bn in extra spending cuts the cable traded below 1.40832.
As soon as Osborne stated that productivity remained low with the outlook being “materially weaker”, the cable dropped 6% to a 2 week low at $14070, and fell 0.34% against the euro to €1.2700.
Another half an hour later, he admitted to missing debt and GDP targets for this year sending the cable tumbling to 1.4060. He blamed the slowdown in the global economy but still maintained that the UK will be running a deficit by 2019-20.
Just a few minutes later he stated that UK economic growth forecast for 2016 was cut to 2.2% and warned of uncertainty if the UK leaves the EU. The cable broke lower and headed towards 1.4050.
The pound went on to stabilize around 1.4070 on following comments – freezing of fuel prizes, Beer, cider and whiskey duty frozen and a tax on sugary drinks to raise £520 million towards children’s health. Sugar stocks reacted accordingly – Tate & Lyle dropped 10%, Britvic was down 3% and AG Barr makers of Irn Bru fell almost 5%. Meanwhile OIL climbed up to 37.53 after the Chancellor cuts North Sea taxes with Shell stocks rising 2.5% and BP up 3%.
In a budget, hailed by the opposition leader, Jeremy Corbyn, as being one for the elite, corporate taxes took another cut to 17% and small businesses are to be exempt from business rates – meaning 600,000 business will save around £6,000 a year.
The cable went on quite a ride over the hour the budget was delivered. Overall weak growth and higher borrowing may be pointing towards record low interest rates for a long time. For the pound, that’s not good news. However, if there’s anything that veteran market participants can tell you, is that what goes up does come down, and vice versa. Almost an hour later and the cable is back up to trading at 1.4080, almost at its pre-announcement level. For those not afraid of the heights, rollercoaster rides like the last hour can be exhilarating times.
