Yesterday the US Dollar has weakened slightly because recent US data has been soft, in the form of retail sales, weaker consumer confidence and producer prices remaining on a steady foot.
Investors now expect the Federal Reserve to cut interest rates in December with markets now pricing in around an 85 percent chance of that happening. An interest rate by the Federal Reserve should lead to some weakness in The Dollar as it becomes less attractive from an outside investment point of view.
This morning New Zealand announced its latest interest-rate decision overnight and cut rates by 0.25 percent, taking the cash rate to 2.25 percent. Normally a rate cut weakens a currency, but this time the New Zealand Dollar actually jumped. This is because the central bank hinted that this may be the final cut for now and that they do not expect to lower rates much further next year. Investors have reacted to this by buying The New Zealand Dollar, due to a lack of interest cuts now making the Dollar a more favourable asset.
Moving our attention to today, the most important release will be the Budget. The Chancellor is facing a financial gap of around twenty to thirty billion pounds that she must close. How she chooses to do this will drive the market reaction.
Most analysts believe the Budget will focus on raising money rather than cutting spending. This could include: Keeping Income Tax thresholds frozen, possible Capital Gains Tax adjustments and tighter pension rules which will include limits on salary sacrifices.
If the Budget looks balanced, responsible and credible, the Pound could see a relief rally. Markets will want to see that enough funds can be raised to fulfil this black hole, but also without stumping business growth. If however the Budget raises too little money or includes measures that could slow the economy, the Pound could fall quickly.
Markets will be watching to see whether the Chancellor avoids policies that increase inflation. Some economists believe earlier changes may have pushed inflation up by one percentage point. If the Budget avoids that this time, it could help support confidence in the UK outlook.
GBP/EUR 1.1367 GBP/USD 1.3166 GBP/AED 4.8372
GBP/AUD 2.0259 GBP/CHF 1.0613 GBP/CAD 1.8543
GBP/NZD 2.3196 EUR/USD 1.1567 GBP/ZAR 22.5917