Money matters
Tomorrow is the day that Chancellor Jeremy Hunt will deliver the Spring budget to the House of Commons. He has been keen to avoid the mistakes of his short-tenured predecessor. Whilst the infamous mini budget was notable mostly for its baseless largesse in favour of the British public and business, it was also scorned by Parliament for being leaked to the public before it was presented to the house. Keen to avoid any parallels with the Truss-Kwarteng era, Hunt’s Treasury has been relatively tight lipped regarding the policies to be unveiled tomorrow.
Amongst his MPs there is a hope that the Chancellor has managed to fund an individual taxation cut for all taxpayers, despite shrinking fiscal headroom. With support amongst the British electorate for the party most recently being observed around 20%, the budget is one of the last political gimmicks left to try to shift public favour back towards the incumbent government. Assuming, as seems most likely, that the Chancellor has managed to fund a personal (income) tax cut he has two options: cut VAT or cut the basic income tax rate itself. The latter always polls better despite having similar implications at an individual level. It can be more expensive as far as the coffers are concerned but it is likely we see a cut to the basic rate of income tax tomorrow.
Provided the cut is modest (less than or equal to 2%) and provided opportunity costs made elsewhere demonstrate the cut can be afforded, GBP shouldn’t suffer. Implied volatility has been rising across the developed FX spectrum after an impressively low-volatility February. This shift in the wider market environment does raise the market risk that the budget presents. However, despite this, it remains unlikely that the budget would be the catalyst for a return to significantly higher levels of volatility in GBP and the wider FX market, but the risk is certainly not zero. More likely candidates for a spike in volatility are the ECB’s meeting on Thursday and US labour market data on Friday.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Great British Pound
Humphrey Percy
Wed 6 Nov 2024
Great British Pound For buyers of USD and EUR versus GBP, the lead up to the results of the US Presidential Election have thrown up an opportunity given that USD has seen a weaker performance in the past two days. The likelihood is that there will be some swings in the next few days ahead of […]
Daily Brief – UK Statistics
Humphrey Percy
Wed 13 Nov 2024
UK Statistics With wage growth at 4.8% higher year on year for the 3 months to the end of September and unemployment rising to 4.3% versus the expected 4.1% yesterday, the reasoning behind the thinly veiled warning from Bank of England Governor Andrew Bailey is that they were taking a measured approach to further interest […]
Daily Brief – Trump and Europe
Humphrey Percy
Mon 11 Nov 2024
Trump and Europe Even before a week has elapsed since Trump’s resounding victory, analysts are scrabbling to work out what it all means for Europe. Broadly for the major European economies the sanctions mooted by Trump in his election pitch will mean a fall in their individual 2025 GDPs of between 0.3 and 0.4% and […]
