Sterling Surges Towards Best Euro Exchange Rate of 2014 as Osborne Promises Balanced Books

The British pound (GBP) has been boosted on global currency markets following the release of growth-friendly policies by the UK’s finance department.

The Autumn Statement, delivered by the Chancellor George Osborne, has been described as ‘safe and confident’ by foreign exchange brokerage HiFX.

The pound to euro exchange rate traded a whopping 0.80 pct higher on a day-to-day basis following the statement.

GBP/EUR is quoted well above 1.2700 and appears intent to test the best exchange rate against the euro of 2014 located just north of 1.28.

The pound to dollar exchange rate (GBP/USD) traded 0.30 pct higher having reached 1.5684.

The currency is also a full half percent higher against the Australian and New Zealand dollars.

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Sterling Rallies in Rection to Osborne Statement

Ahead of the statement Osborne was expected to admit defeat on the deficit.

"Of course he didn’t, and instead he said that the budget deficit this fiscal year is lower than last year at GBP 91.3bn, this is expected to drop to GBP 75.9bn in 2015. This drop means more austerity," notes Kathleen Brooks at Forex.com.

She notes; "interestingly, GBP bulls liked this austerity talk from Osborne, and GBPUSD is at its highest level of the day, testing 1.5700 after Osborne said he would continue to cut welfare spending."

Chris Towner, managing director of HiFX says:

“All in all sterling rallied in reaction to this confident budget and the Chancellor looks to be buoyed by the strong performance of the UK economy over the past 12 months.

“Going into 2015, although the Government will be helped by the performance of the economy, the questions in voters’ minds will be whether families are better off and whether the rewards of the stronger performance are being shared out fairly.”

Strong Data Prompts GBP Buying Interest

However, the GBP push higher began at 09:30 with the release of a strong set of figures from Markit/CIPS whose Services PMI rose to 58.6 in November after falling sharply to 56.2 in October.

The release was ahead of expectations and confirmed to markets that the UK economy continues to defy the Eurozone slowdown.

This will likely serve to bring forward expectations for the first interest rate rise at the Bank of England which had been pushed back to Autumn 2015.

November’s survey of the UK service sector indicated a strengthening of activity growth amid reports of firm demand and rising volumes of new business.

“Capacity subsequently remained under pressure, leading to a further increase in levels of
work outstanding, and companies responded by adding to their payroll numbers,” reports Markit.

Bank of England Governor Mark Carney has said his policy making committee will continue to base their decision to raise interest rates on the amount of slack, or spare capacity, in the economy.

With signs that it is tightening the Bank could well adjust their timing on interest rates - a key for the pound.

We see today’s release as key to the notion that a break of 2014’s best exchange rate against the euro will be broken in late 2014 / early 2015.

We are forecasting 1.3 GBP/EUR to be touched next year.