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Osborne, The U.S. And Euro Bears All Give Thanks

Published 11/26/2015, 04:47 AM
Updated 07/09/2023, 06:31 AM

Osborne uses some slack to smooth the path

Yesterday’s Comprehensive Spending Review and Autumn Statement from Chancellor George Osborne was a non-event for currency markets. Osborne’s ability to be able to smooth out spending cuts in the short term whilst still maintaining projections of a budget surplus in 2019/20 has come from a forecasted improvement in tax receipts through the coming years.

The lack of changes that we have seen to tax credits are positive for consumption measures in the coming years and will likely boost VAT receipts. Finally there is some thinking that the Office of Budgetary Responsibility previously assumed that the Bank of England would start selling off the assets it bought under its quantitative easing plan when the base rate reached 1%. That is now expected to happen at 2% and therefore we can expect and plan for increased income from the coupon on that debt.

Sterling remains unaffected

The near-term fiscal pressures on inflation remain, however, and we have to therefore think that the pace of Bank of England interest rate rises will lag those of the Federal Reserve and contribute to weakness in GBPUSD.

Focus will remain on Westminster today as discussions begin within Parliament about UK military operations against ISIL within Syria. Political pressures will remain on GBP as we move through 2016 courtesy of the referendum on the UK’s EU membership.

Rumours give us a hint of the ECB’s bazooka

The euro is sitting at seven month lows against the US dollar this morning as leaks around the make-up of the European Central Bank’s possible policy reaction at next Thursday’s meeting start to emerge. As well as an increased amount of asset purchases over a longer period than initially thought, we have to believe that interest rates on bank deposits will be cut further into negative territory.

Yesterday’s Reuters report, which sent the euro lower, suggested that the ECB’s deposit rate could be split or fanned so as to charge banks who hold more money with the ECB a far weaker rate. The theory remains that in doing so banks will feel the need to lend more money, credit conditions will ease, spending will drag inflation higher and the world will right itself.

The only problem is that these programs have continued to ‘push on a string’; that spending and expenditure by individuals and businesses increases as confidence returns and the jobs market recovers. In the absence of this, these spending measures are enough to prevent confidence dynamics from getting worse whilst simultaneously weakening the single currency.

US data keeps greenback strong through Thanksgiving

The US dollar's strength was maintained yesterday by strong durable goods order numbers that are starting to recover from the hit that the slump in oil earnings has caused. Likewise, the initial jobless claims numbers remained at very low levels and continue the optimism that next week’s payrolls announcement will be strong, while personal income dynamics should allow for decent Thanksgiving, Black Friday and Christmas spending.

The Day Ahead

It is Thanksgiving in the United States today and therefore, while we believe things will be quiet, the drop in liquidity in markets can lead to some volatility if something strange were to happen. Both the data and central bank speech calendars are quiet.

President Hollande is meeting President Putin today in Moscow to discuss the threat of ISIL.

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