GDP forecast up, borrowing forecast down, budget boring
The UK Chancellor Philip Hammond delivered his first full budget statement yesterday. He upgraded the 2017 GDP forecast to 2.0% from 1.4%, but forecasts for subsequent years were downgraded slightly. The 2016/17 budget deficit forecast was lowered to £51.7bn from £68.2bn previously, although this primarily reflected one-off factors and medium-term estimates were only slightly lower.
The revision, however, did little to provide any immediate respite for Sterling amid persistent Brexit worries, especially after Theresa May suffered another implementation setback in the House of Lords on Tuesday, but the end of March deadline should still be met.
The Pound has had a punishing few months versus the Dollar with the uncertainty of the Brexit negotiations causing capital flows away from the Pound. However, the near-term outlook is not highly negative despite ongoing rhetoric around the impact of an exit from the EU. Inflationary pressures are starting to awaken in the UK and GDP is proving to be relatively robust in light of the ongoing uncertainty. Subsequently, there are plenty of fundamental factors to suggest that the currency pair’s current malaise is only a temporary decline.
The US ADP employment report convincingly beat the consensus view. This bolstered expectations of Friday’s Nonfarm Payrolls report and reinforced expectations that the Federal Reserve will increase interest rates next week. Although the rate hike is priced-in already, the strong data will also lead to some speculation that the Fed will need to increase rates at a faster pace to combat risks of the economy overheating.
At lunchtime, the European Central Bank (ECB) will announce the results of its monetary policy meeting. The uncertainty surrounding the upcoming European elections in most major local economies is making policymakers cautious of change. There have been no significant changes in inflation since the previous meeting and headline CPI rose to its highest in four years in February, at 2%. However, core inflation remained unchanged at 0.9% for a third consecutive month, supporting the ECB’s view that the uptick in inflation is due to temporal factors.
In addition, Draghi has repeatedly said that asset purchase facilities will remain in place until 2019. All of which means that the ECB is largely expected to keep its bond-buying program and rates unchanged. However, the rhetoric used is expected to be more optimistic, reflecting the economic growth seen in the region since late 2016.
The ECB is also expected to upgrade is growth and inflation forecast, although the latest, revisions will likely be shallow. Unless Draghi announces the intention of rising rates from current negative levels, or tightening the easing programs, Euro gains will likely be short-lived, should it gain on hawkish words.
China’s Yuan weakened across the board yesterday on strong demand for the Greenback (US Dollar) from the corporate market. This caused the state-owned banks to offer Dollar liquidity to keep the Chinese currency from falling too fast. Major state-owned banks were noted to be selling Dollars in the onshore foreign exchange market. They said that the selling was a bid to support the Yuan after it weakened past 6.92 to the Dollar in early trade. Prior to market open, the People’s Bank of China set the midpoint rate at 6.9125 per US Dollar, weaker than the previous day.
Data to watch: 12.45pm EUR ECB Interest Rate decision. 1.30pm EUR ECB Monetary Policy Statement. US Initial Jobless Claims.