GBP Under Pressure……….
As expected, yesterday’s Comprehensive Spending Review offered little for financial markets to get their teeth into, even if as a political event it offered another opportunity for coalition opponents to attack the hastier methods of deficit reduction preferred by their party opposites. Commons opponents were always going to seize the political initiative and denounce the spending cuts as “too deep, too fast”, and, in a more emotive display, explain that “the tragedy of the Chancellor’s announcement is that it did not have to be this way and that we now risk falling back into recession”. Meanwhile, as far as the markets are concerned, deficit reduction for UK PLC is number one priority, and George Osborne did nothing to unwind the goodwill generated by the wholesale changes announced in June’s emergency budget.
As a brief summation, The CSR was largely all about allocating the big picture spending totals set out in June. Of total government spending in 2010-11 around 40% reflects Annually Managed Expenditure (AME), much of which includes the welfare bill and spending on debt interest. The rest reflects spending on government departments and programmes. So the Chancellor had a choice of making cuts to the AME budget, most obviously via welfare reforms, and thereby lessening the cuts needed in departmental spending. After promising the voters that he would ring fence areas of health and education as much as possible, he took that opportunity. Of the approximately £50billion of consolidation measures needed to be announced in the CSR, around £10billion come from cuts in AME. Of these £7billion come from welfare cuts, the most significant being the removal of child benefit from high earners and a reform to Employment and Support Allowance. Other key areas for the largest real term reduction came from the Communities, DEFRA, Home Office, Culture and Treasury budgets. A reform on tax for the financial services industry is also on the horizon.
As far as the FX markets are concerned, Sterling looks to have reacted to US dollar strength on the back of a positive session for Wall St yesterday, and heightened expectations of renewed QE after yesterday’s three-way split in the MPC vote, rather than yesterday’s Comprehensive Spending Review. Sterling is also under pressure versus the dollar and euro over yesterday’s trading session and overnight as markets reacted to the dovish tone of the minutes of the last Bank of England policy meeting.