The much-anticipated Autumn budget statement, announced by UK chancellor Jeremy Hunt on 17th November, delivered a substantial package of tax rises combined with spending cuts, that at £55bn, seek to reverse the shambolic ‘mini’ budget tax cuts and unfunded spending plans, orchestrated by his predecessor Kwasi Kwarteng just eight weeks ago. The package has also been designed with the aim to tax those who can afford it more, with an increased tax on energy companies, with their windfall taxes on profits rising from 25 to 35%, and the point at which higher income earners get taxed has been lowered from £150k to £125,140.

Thoughts from the dealing desk

“The most important informational release on 17^th November was the Autumn Statement from the ‘new’ Tory Leadership. Jeremy Hunt, Chancellor of the Exchequer and fellow Old Carthusian announced a slew of tax rises and spending cuts worth billions, in an attempt to tackle the soaring inflation issue and to try and restore the UK’s credibility with international markets, in what can be considered a highly austere autumn budget. The Office for Budget Responsibility judges UK to be in recession, the OBR predicts growth for this year overall of 4.2%, but size of the economy will shrink by 1.4% in 2023. Growth of 1.3% predicted for 2024, 2.6% for 2025, and 2.7% for 2026, UK’s inflation rate predicted to be 9.1% this year and 7.4% next year. Unemployment expected to rise from 3.6% to 4.9% in 2024. GBP/USD took a turn lower yesterday morning following what has been a very positive week for the Pound, since the release of softer US inflation data last week. The Pound had gained over 5% against the Dollar over the past week, breaking into the 1.200’s on a thin wick. The austere autumn budget sent the pound lower against the USD by over 1% as tax increases and spending cuts were absorbed by the wider market. Many clients had feared the budget may send the Pound lower and looked at covering USD exposure prior to the budget. With the pound falling during the morning on 17th, last minute hedges were put in place to protect against the anticipated downside movement on GBP/USD & to take advantage of the recent rally for cable. Clients whom acted early on 17th managed to mitigate most of the losses for GBP ahead of the budget. ”

-Oliver Taylor, FX Dealer

EUR

Mixed signals

Having bounced from around 0.9750 to just under 1.0400 from the beginning of November to the end of week commencing 7^th November, the following week has been fairly flat for EUR/USD, with the single currency maintaining those gains, without pressing forward. Mixed messages have played their part, with rumours of a split amongst the ECB as to whether they should continue raising Euro area rates at 75bps going forward, or adopt a smaller pace of hikes. Economic data has also played its part, on the one hand, slightly softer regional headline (Harmonized) yearly inflation of 10.6%, versus an expectation of 10.7% could be considered a positive, however, weaker regional employment gains, soft growth, and tepid manufacturing data, also suggest that the economic slowdown is accelerating.

USD

Softening inflation

After week commencing’s 7^th November strong rally in risk assets driven by the weaker US CPI report, the rally was further cemented in the early part of the following week, after the latest US PPI report also highlighted the emergence of potentially softening prices. The PPI index for final demand rose 0.2% (MoM/Oct), and way below estimates of around 0.5%, helping to ensure that the yearly headline reading dipped to 8%, from 8.4% previously. Core PPI dropped from 7.1 to 6.7% (YoY). Markers rejoiced (again).

Not a great time to be a dollar bull

The dollar decline that began after the dollar index (DXY) peaked at 114.70 in the last week of September, continued until the middle of week commencing 14^th November, reaching a low of 104.90. Looking ahead, it is probably also reasonable to suggest that, unless there is a material event for markets to go into a nosedive, the high for the dollar this cycle has probably been reached. Amongst the major currency pairs, USD/JPY has now moved from around 152.00, to under 140.00 in that time, and most of that move happening well after the BoJ last intervened. Impressive indeed.  The week commencing 21^st November is all about the US Housing market, with further declines highly likely given those rate hikes, and evidence of previous declines.

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