Budget: ‘Spreadsheet Phil’ no market-mover

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The Chancellor’s last Spring Budget has had a fairly muted impact on the markets. There were no surprises, the budget was fiscally neutral, and not even decent upgrades to this year’s growth forecast or a rosier fiscal outlook could boost the pound, which has at the time of writing managed to retrace only 38% of the earlier sell off in GBP/USD.

Pound recovery cut short by whopping ADP report

There are two reasons for this small reaction in GBP to the Budget: firstly, the pound was knocked by a strong ADP report for February, which boosted the US dollar. Spread-sheet Phil, couldn’t compete with a whopping ADP report, 298k jobs were created in the US’s private sector in Feb, expectations were for a 187k increase. This is the strongest reading since 2014, and, if followed by a strong NFP report on Friday, will almost guarantee a rate hike from the Fed next week. In contrast, the Chancellor has all but made a rate hike from the BOE impossible by maintaining a tight fiscal stance for the rest of this Parliament.

Are the OBR forecasts too optimistic?

The second is slightly more concerning for the pound’s prospects for recovery. Although the OBR revised up its growth forecast for this year to 2% from 1.4% in November, public sector borrowing is set to continue to fall for the next three years, and the UK is set to meet its EU deficit limit this year, with forecasts for our deficit to be 2.6% of GDP this fiscal year; UK asset prices don’t appear to be impressed. Are these deficit forecasts too rosy, especially if Brexit negotiations take a turn for the worse, requiring more fiscal support for the economy?

Hammond kicks the can down the road to the Autumn Budget

Hammond has commissioned a lot of papers, for example on business rates relief and support to boost North Sea oil production, this suggests that the big announcements will have to wait for the next Budget in the autumn. Thus, Hammond managed to kick the can down the road with this Budget, which may also be a reason for the muted response from the market.

In terms of the market response, it appears to have been sell GBP on the Budget rumour, with limited GBP buying on the Budget fact. However, after starting Wednesday as one of the weakest performers in the G10, the pound is now middle of the pack. So the Chancellor, whose nickname could be changed to fiscally-neutral Phil, did manage to stem the flow out of the pound. His talk of balancing the books, boosting the UK’s fiscal position and inflation-busting wage increases over the course of this parliament, did go down relatively well with the pound. But, we doubt that Hammond’s Budget will reverse all of Wednesday’s losses in GBP/USD, which could see the tenth consecutive loss for cable, the longest losing streak since September 2008.

GBP/USD: 1.20 still calling

The outlook for the pound also looks shaky, the ADP report has widened the UK-US yield spread further into negative territory. This yield spread has a strong positive correlation with the pound, so another record decline in the yield spread could trigger further GBP/USD weakness in the medium-term, and 1.20 is still a key target for GBP/USD.

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