Pound Sterling Today: Budget Boost Ahead, Coronavirus Jitters, Soft Start to New Week vs. Euro and Dollar

- Budget boost could be bigger than expected
- Coronavirus key driver of financial markets
- UK looking to kick-start U.S. trade negotiations within two weeks

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- Spot rates at time of writing: GBP/EUR: 1.0808, -1.75% | GBP/USD: 1.1852, -2.15%
- Bank transfer rates (indicative): GBP/EUR: 1.0520-1.0596 | GBP/USD: 1.1537-1.1620
- Specialist money transfer rates (indicative): GBP/EUR 1.0650-1.0701 | GBP/USD: 1.1650-1.1745 >> More details

The British Pound starts the new week as an underperformer, recording losses against the U.S. Dollar which appears to be on the charge owing to a renewed bout of nerves concerning the coronavirus.

However, against the Euro the UK currency looks relatively better supported with the market assessing the relative impact of the virus on the EU as being potentially more severe than will be the case on the UK economy.

We would also expect Sterling to remain relatively well supported against the Euro and other major currencies over coming days and weeks as markets gear up for the March 11 Budget announcement which should bear news of a large increase in UK government spending.

The Pound-to-Dollar exchange rate is trading 0.30% in the red at 1.2913, the Pound-to-Euro exchange rate is meanwhile trading 0.15% lower at 1.1932.

Budget Boost for Sterling Could be Bigger than Anticipated

GBP Positive

According to reports out on Monday, Chancellor Rishi Sunak may relax the UK's fiscal rules in order to allow the Government to boost expenditure by a greater level than markets might currently be expecting.

The Telegraph says the Government might be seeking to raise £26BN extra a year through borrowing when the Budget is announced next month.

The Chancellor is said to be considering allowing the Government the ability to go 1% above or below a balanced current budget – a move that could raise an extra £26BNn for spending.

Another option, which would raise an extra £11BN, would relax the fiscal rules to allow the Government to achieve a balanced budget within five, rather than three years.

The Government had set itself a set of rules on spending, borrowing and taxation that would ensure it balanced its books within a set period of time, however the politics of such responsibility do not look attractive to the new government of Boris Johnson, which is intent on boosting expenditure on the NHS, schools and transport.

"Fiscal rules tend to lack teeth. Governments set the rules and governments can change the rules. The fiscal rule is sacrosanct until such time as the government is at risk of breaching it, at which point it is usually replaced with a new one," says Neil Shearing, Group Chief Economist at Capital Economics.

Increased fiscal expenditure is expected to ultimately be supportive of UK economic growth which in turn is supportive of Sterling, and is seen by some analysts as one reason to expect a firmer currency in the first half of 2020.

"We continue to view anticipation of fiscal stimulus in the 11 March budget as a GBP-supportive factor in the short-term, especially against EUR, where the potential for constructive fiscal policy surprises is arguably low," says Shahab Jalinoos, Managing Director and the Head of International Trading Solutions Trading Strategy at Credit Suisse.

The news is supportive of Sterling.

Coronavirus Bigger Risk to Euro than the Pound

GBP/USD Negative, GBP/EUR Positive

The key theme for global markets at present is the coronavirus outbreak, which appears to be spreading its tentacles beyond just China.

Global stock markets traded in the red on Monday, February 24 amidst news of a rise in cases and deaths in South Korea, Italy, Iran and other countries suggesting this is now a global pandemic. Indeed, Professor Devi Sridhar, director of Edinburgh University’s global health governance programme, said "the window of opportunity to contain the outbreak is closing very quickly.”

The U.S. Dollar has proven to be an outperformer in times of increasing fears surrounding the virus and we are therefore not surprised to see the Dollar advancing on Monday.

"Coronavirus jitters have returned to markets this week," says Rhys Herbert, Economist at Lloyds Bank. "Currency markets have been less volatile but a key theme is the strength of the U.S. dollar. The Bloomberg USD Index is back close to its 14-month range high as the dollar reached its highest level against the Euro since mid-2017."

But how do the Pound and Euro slot into the equation though?

Foreign exchange analysts at one of northern Europe's largest lenders, Nordea Markets, have adjusted higher their forecasts for the British Pound against the Euro, citing the impact of the Coronavirus outbreak for the decision.

"We adjust GBP in a slightly stronger direction as the political instability around the Brexit 2.0 negotiation is not a market theme short-term. Wuhan/China is more important negative news for EUR than GBP," says Jan von Gerich, Chief Analyst at Nordea Markets.

Negative coronavirus developments are seen as supportive for Sterling against the Euro, but not against the Dollar.

Trade Negotiations with U.S. to Kick Start within Two Weeks

GBP Neutral

Expect the issue of trade negotiations to become a key factor for the Pound in 2020, particularly in the latter part of the year.

It is reported on Monday that the UK is looking to kick-start trade talks with the U.S. within two weeks, with Prime Minister Boris Johnson apparently becoming frustrated by the EU's apparent lethargy on the matter of EU-UK trade talks.

According to the Telegraph, the Prime Minister will next week (March 02) publish the Government’s red lines for its U.S. trade negotiations which are expected to push back on US demands for its drug and health firms to have greater access to the British market.

While a comprehensive free-trade agreement with the U.S. would likely be supportive of Sterling, we would expect the negotiations to be fraught with difficulty as the U.S. will inevitably look to agree a deal that reflects President Trump's 'America first' policy.

The EU are meanwhile this week expected to continue internal discussions regarding the mandate they are to provide their negotiating team.

We reported on Friday some potentially Sterling-supportive news that the EU's latest draft mandate for EU-UK trade negotiations shows that the EU won't necessarily be pushing for 'dynamic-alignment'.

The main change to the draft is that "the envisaged agreement should uphold the common high standards, and corresponding high standards over time".

"The addition of the word "corresponding" is to make clear that the EU expects both "non-regression" of regulations in the UK and some kind of parallel evolution of EU /UK rules over time — but it does not go as far as requiring full dynamic-alignment," says Jim Brunsden, Financial Times reporter in Brussels.

he issue of dynamic-alignment is key for the talks as it could be where they succeed or fail. Dynamic-alignment is essentially a requirement for the UK to adhere to a certain set of laws and standards, set by the EU, in order to have a free-trade agreement.

The rub for the UK is that following EU rules does not amount to the kind of sovereignty that Brexit promises; therefore the main point of concern for foreign exchange markets when trying to gauge the outlook for Sterling is how the issue of dynamic-alignment plays out.

That the explicit demand for dynamics-alignment is no longer in the agreement should therefore suggest that the EU are giving themselves the kind of space within which to negotiate and not kill talks off.

"We believe that the GBP will weaken as the problems associated with negotiations with the EU emerge and the end of the transitional period
approaches," says Lars Henriksson Senior Strategist FX at Handelsbanken.

However, we reiterate that we do see trade negotiations (or lack thereof) as being a secondary issue for Sterling at the current juncture.

Today's news is therefore neutral for Sterling.