Pound Sterling Holds Ground against Euro and Dollar as FX Markets Welcome Budget 2020

Image © HM Treasury, Gov.uk

- 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

Chancellor of the Exchequer Rishi Sunak has announced that £30bn in immediate spending will be made available to counter the economic slowdown prompted by the coronavirus outbreak, with an additional £175bn increase in spending due over the next 5 years.

The fiscal boost contained in Budget 2002 has been interpreted by foreign exchange markets as being largely supportive of Sterling as it should provide a cushion for the economy as it faces the dual challenges of the coronavirus outbreak and the shift in trade relations between the EU and UK.

Sunak says the budget expenditure still meets the UK's fiscal rules, with space to spare. The OBR numbers however don't include coronavirus fiscal measures suggesting the government might breach the rules of this spending is accounted for.

Sterling has endured a relatively volatile days trade as markets digest the impact of the Bank of England interest rate cut as well as the new fiscal announcements. Markets appear to have arrived at the conclusion that the coordinated approach of both the Bank of England and the Treasury is likely to be credible and effective, certainly when compared to other countries that do not have a government with a stable majority or an independent central bank. 

"Rishi Sunak has impressively succeeded in living up to expectations. In spite of the emerging coronavirus crisis, fiscal measures of this kind can be expected to provide noticeable relief for the UK economy. The pound sterling remains relatively undervalued," says Marc-André Fongern, Head of FX Spot & Options at MAF Global Forex.

The Pound-to-Euro exchange rate is quoted at 1.1423, up from a low of 1.1316. The Pound-to-Dollar exchange rate is quoted at 1.2948, up from a day's low of 1.2842.

Markets had been looking for a sizeable and convincing response to the coronavirus epidemic, which is expected to reach its peak in the UK at some point in the next two weeks.

"The UK has clearly delivered a credible and robust response, setting us ahead of the curve, compared to other nations," says Phil McHugh, Chief Market Analyst at Currencies Direct. "In the short term the pound will welcome both the size and scope of this response – it’s a breath of fresh air for markets, despite the expected significant but temporary impact from the virus. We see sterling holding its current value in the short term as a result."

Market focus remains on the coronavirus outbreak, therefore central banks and governments will be benchmarked against one another in terms of the measures they announce to deal with the economic impact of the virus, leading to adjustments in the value of currencies.

"There is likely to be a temporary disruption to our economy... up to 1/5 of working population may need to be off work at any one time," said Sunak, warning productivity and consumer spending will fall, having a "significant impact" on the UK economy.

The Chancellor said whatever extra resources the NHS needs to cope with the coronavirus, it will get.

Statutory sick pay will be paid from day 1, not day 4 and Sunak goes further saying statutory sick pay will go to all who are advised to self isolate.

Since 2010 the UK has grown faster than France, Japan and Italy. #Budget2020 pic.twitter.com/wz9rprt2MV

— HM Treasury (@hmtreasury) March 11, 2020

The self employed and those involved in the gig economy can claim the relevant benefits from day one, as opposed to day eight.

The Chancellor says government will refund the cost to businesses, of fewer than 250 employees, the cost incurred in paying statutory sick pay, at a cost of £2bn to the government.

"It's the level of Statutory Sick Pay that is the problem, not its availability. It equates to just 20% of the average wage, versus 70% in most other European economies," says Samuel Tombs, UK Economist at Pantheon Macroeconomics.

Regarding measures to target the cashflow at large firms, Sunak says the Government will support banks in offering loans of up to £1.2M via a new Coronavirus Business Interruption Loan Scheme, which is guaranteed by government.

A stand-out announcement was that business rates would be abolished altogether for the rest of the year for smaller businesses (with rentable value sub 51k), costing Treasury £1bn.

A £4K cash grant for smaller companies was also announced, amounting to a further £2BN cash injection.

Concerning growth forecasts, the Office for Budget Responsibility now expects the UK economy to grow 1.1% in 2020 vs. 1.4% forecast previously.

The forecast for 2021 is at 1.8% vs 1.6% previously.