httpvh://www.youtube.com/watch?v=tyWmCUvSP5o

Have you ever been in a car crash? Not a ding or a nudge at the lights but a full blown smash? I haven’t but a friend I spoke with yesterday came up with a brilliant metaphor for the budget and the UK and it’s something I’ll share with you.

The past 6 weeks since the election have been like those few seconds before impact; the occupants of the car, the Great British public, have been bracing themselves for an almighty collision. A collision of political ideology and economic reality. That collision was the budget. However, instead of ploughing headfirst into the oncoming brick wall we have instead just slid off the road and ended up in a hedge. We’re ok. There are some injuries yes (VAT, Child Tax Credit, Disability Allowance), but it’s not as bad we thought.

Osborne’s budget yesterday was billed as one for the entire parliament and not just for the upcoming 8 months and it certainly was. Should the measures put forward be enacted and the growth targets hit then we have dodged a very large bullet. It’s not going to be easy of course but I’m confident in the UK and, through that, the pound.

In the immediate aftermath of Osborne’s announcement sterling was bid higher on the exchanges pushing into the mid 1.48s and 1.20s against the USD and EUR respectively. When Osborne started speaking they were both around 0.6% lower. Sterling was also boosted towards the close of play as a couple of industry bodies and ratings agencies weighed in. OECD boss Angel Gurria hailed Osborne’s emergency Budget as ‘concrete and far-reaching, and appropriate’ while Fitch, one rating agency that needs to be bullish on the UK stated that the budget, if delivered, “materially strengthens confidence in AAA rating”. Praise indeed for the Chancellor and his team.

Some more measures have been announced overnight including some more details on the bank levy. The chancellor has been keen to impose a tax on bank liabilities for a while and was quick to point out that the UK would not be alone in doing this; Germany and France are also imposing a similar penalty. Overnight it has been announced that the levy will be 0.07% on a bank’s wholesale liabilities; less than the 0.15% that the US had proposed. This should raise about £2bn going forward but should not damage the UK’s competitiveness.

Sterling cannot afford to rest however as the data keeps coming. The latest set of Bank of England minutes are due at 09.30 and while there appears to be a split emerging between some members of the MPC (Sentence’s more hawkish comments, King’s dovish Mansion House speech) we expect the decision to hold rates at 0.5% and QE at £200bn was unanimous. We also have the European PMIs from the services and manufacturing industries at 09.00 with both expected to see a slight fall but still stay above the 50.0 level denoting overall expansion.

US data comes in the form of the FOMC rate decision (19.15) and we expect more dovish leaning from Bernanke et al and a weaker dollar as a result.