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British Pound Rallies as Autumn Statement Reveals New Fiscal Stimulus

British Pound Rallies as Autumn Statement Reveals New Fiscal Stimulus

Christopher Vecchio, CFA, Senior Strategist

Talking Points

- UK Office of Budget Responsibility raises 2016 GDP forecast, cuts 2017 and 2018 GDP forecasts due to Brexit fallout.

- UK Treasury no longer seeking budget surplus by 2019-20; now planning £122 billion in planned borrowing over the next five years.

- British Pound rises as UK Gilt yields perk up on fiscal stimulus hopes.

UK Chancellor of the Exchequer Phillip Hammond is currently in UK Parliament, delivering the mini-Budget affectionately known as the “Autumn Statement.” This Autumn Statement is garnering particular attention, considering it is the first budget laid out since the United Kingdom voted to leave the European Union – Brexit.

Grappling with the consequences of the economic fallout, Chancellor Hammond’s Autumn Statement was a stark confrontation of the realities of what Brexit will wrought, according to the Office of Budget Responsibility. Presented below are the key highlights thus from the Autumn Statement (as seen in the DailyFX Real-Time News feed).

  • UK Chancellor Hammond: UK economy has shown resilience since since EU vote; Brexit vote means UK must take fiscal imbalances.
  • OBR raises 2016 forecast to +2.1% from +2.0% in March; cuts 2017 GDP to +1.4% from +2.2%; cuts 2018 GDP to +1.7% from +2.1%.
  • OBR sees growth -2.4% lower over the forecast period than if UK had voted to remain in EU.
  • BOE actions have helped support growth since EU vote; a credible fiscal policy is needed to sustain confidence, LT health.
  • Abandons surplus target in 2019-20; aims to return to balanced budget as early as possible in the next parliament.
  • Will publish three new fiscal rules resulting from the Autumn Statement.
  • Cyclically adjusted borrowing should be below 2% by the end of this parliament.
  • Forecasts 2016-17 borrowing of £68.2B from £55.5B in March; 2017-18 borrowing of £59.0B from £38.8B; 2018-19 borrowing of £46.5B from £21.4B; and 2019-20 borrowing of £21.9B from projected surplus of £10.4B.
  • Plan is to add £122b in planned borrowing over next 5 years (to help economy cope with #Brexit impact).
  • Underlying debt to peak at 82.4% this year, over 90% for next year; there's an urgent need to address fiscal situation.
  • Will prioritize investment in infrastructure and innovation to help boost productivity.
  • Will fund new measures through combined tax and spending measures; will form a £23b 'national productivity investment fund.'
  • Plans £2.3b housing infrastructure program; £1.4b for 40K new affordable homes; £1.1b in new transport.

Chart 1: EUR/GBP 1-minute Chart (November 23, 2016)

British Pound Rallies as Autumn Statement Reveals New Fiscal Stimulus

In the immediate wake of the headlines indicating forthcoming fiscal stimulus – the abandonment of the pledge for a budget surplus by 2019-20 is a strong signal – UK Gilt yields rose, in turn, lifting the British Pound across the board – GBP/JPY and GBP/USD both traded higher. Notably, however, was weakness in EUR/GBP, which dropped from 0.8573 to 0.8531 at the time this report was written.

Read more: Profit Taking Driving USD, FX Ahead of Holiday Liquidity Drain

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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