How did the boring budget impact the pound?

Speculation surrounding the UK’s Spring Budget saw the pound drop to seven week lows on Wednesday.

Speculation surrounding the UKís Spring Budget saw the pound drop to seven week lows on Wednesday.

 

But the currency’s reaction to the news was less dramatic than some had anticipated.

What movement have we seen in the currency market?

Although the budget triggered mild pound gains, the GBP/USD exchange rate still extended losses (hitting 1.2146) while GBP/EUR lingered below 1.1550.

The pound fared better against the Australian dollar however (advancing back above 1.6150) and managed to bounce back from a weekly low of 1.6322 against the Canadian dollar to 1.6422.

So, what happened?

The day’s big news, the UK’s Spring Budget, turned out to be a bit anticlimactic. Although the pound broadly weakened in the build up to the event, Chancellor of the Exchequer Phillip Hammond delivered on his pledge to keep the budget boring and GBP edged higher as a result.

Most of what was said had already been preannounced, and although forecasts for growth in 2017 were positively revised from 1.4% to 2.0%, projections for 2018 and 2019 were cut.

The gains in the GBP/AUD exchange rate were actually caused by the Australian dollar falling following surprising Chinese trade figures, while oil prices dropping to an 8-week low left the Canadian dollar weaker.

Meanwhile, support for the US dollar came from an unexpectedly impressive US employment report. The ADP employment change number came in at 298k rather than the predicted 185k and kept the odds of the Federal Reserve increasing interest rates in March high.

The euro’s performance was a little more mixed ahead of the European Central Bankís rate decision.

What should you be looking out for today?

While all eyes were on the UK yesterday, the Eurozone will be dominating the spotlight in the hours ahead and GBP/EUR volatility could follow the European Central Bankís (ECB) latest policy decision.

A cautious outlook or hints that the central bank has no plans to taper its quantitative easing scheme in the near future would be euro-negative and could help the pound bounce back from its lows.

That being said, if ECB President Mario Draghi is encouraging about the Eurozoneís outlook and indicates that rising inflation could prompt the ECB to increase interest rates, we would expect to see the euro gain and GBP/EUR slide.

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