Good morning,
Today is Budget Day here in the UK. Chancellor George Osborne set the stage for Wednesday’s Budget a couple of weeks ago at the G20 Finance Ministers meeting in Shanghai. In interviews with UK publications he stated that the Budget would be used to “undertake further reductions in spending because this country can only afford what it can afford”. To you, me and everybody else that means spending cuts and tax increases unless a dramatic improvement in tax receipts is seen in the January and February numbers.
At a time of which the endorsements of central bankers and bodies like the IMF are focused on fiscal stimulus as monetary policy is having as diminishing impact on growth, Osborne is once again trying to sail upstream.
We expect that the extent of the fiscal consolidation will be seen as a sterling negative in the short term, adding to the political toxicity of the UK referendum on EU membership and the softening patch of growth that the UK is currently slogging through.
Osborne takes to the Dispatch Box at 12.30.
Sterling was very much in the crosshairs yesterday as another couple of polls on the referendum showed a strong performance for the Brexiteers. We also saw the first phone poll that has shown a lead for the Leave camp that has occluded the thoughts that the more reliable phone polls are all showing Remain.
Today’s jobs report from the UK may get lost in the Budget bluster but should continue the recent trend of improving employment and wage fundamentals.
Tonight’s Federal Reserve meeting is not going to become suddenly overshadowed by anything that happens on this side of the pond.
It is our base case scenario that the Fed does not hike interest rates tonight but shows the signs of increasing hawkishness. Indeed, the communication of the Federal Reserve is so important today. I think they simply have to realise that their mandated measures of economic strength are all going well and that it is only the headwinds from abroad, all be they sizeable headwinds, that are taking the shine off things.
We therefore see some USD strength out of the meeting and a hike, all things being equal, at the meeting in June.
Have a great day.