How Budget 2021 can be Bullish for GBP/USD

Image © Pound Sterling Live, Image courtesy of Parliament.tv

Foreign exchange analysts at ING Bank have given their view of what the 2021 budget might mean for Sterling, saying it will likely be a net giveaway that aids the upside case for the currency.

"The UK budget to help the bullish GBP case," says Francesco Pesole, analyst at ING.

The budget is due to be delivered at around 12:30 GMT, and there is some degree of uncertainty over whether or not Chancellor Rishi Sunak will announce new tax rises.

As we note here, raising tax rates is a potential risk to the economy and Sterling.

"We are not looking for a major tax announcement, though the Chancellor may signal an intention to raise taxes next year," says Pesole.

But, reports of an extension of the government's job support scheme until September is seen as being a stimulatory impulse for the economy, that could aid UK growth and help the currency higher.

"Overall, the additional fiscal support announced should underscore the constructive outlook for GBP for 2Q, with further fiscal help facilitating the economic rebound and making GBP the outperformer in the G10 FX space," says Pesole.

ING Bank forecast GBP/USD to breach the 1.5000 level in the second half of 2020 and say "dips below 1.4000 should be faded".

At the time of publication the Pound-to-Dollar exchange rate was seen at 1.3971, having been as low as 1.3858 this week but as high as 1.4243 last week. Banks are offering transfer rates in the region of 1.3969 but independent transfer providers are tighter on the margin they offer for transfers coming in at around 1.3870.

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Foreign exchange strategists at TD Securities warn that withdrawing fiscal support prematurely could prove problematic for Sterling.

"While the UK's fiscal support measures will be extended, it is also clear those days are numbered. We want to see how strong that messaging is today, as fiscal retrenchment would mark a significant divergence from other major G10 economies — the US in particular," says Mark McCormick, a strategist with TD Securities.

"The combination of very loose monetary policy and tighter fiscal settings tends to be a toxic one for a currency. Especially, we would argue, if that currency is doing so on its own. This could expose GBP," he says.

The Bank of England maintain a loose and expansionary monetary policy programme, the reading from McCormick is that Sunak must reciprocate to ensure the impulse behind Sterling remains constructive.

Constructive is the stance of strategist Jeremy Stretch at CIBC Capital Markets, who has given his view on Sterling's outlook as it relates to the budget.

"We remain constructive on Sterling as growth is likely to be revised up while the extension in the furlough schemed precludes the rapid jump in unemployment seen in BoE forecasts. Provided there are no unexpected fiscal surprises an upbeat growth assessment allied to USD consolidation points towards 1.4082," says Stretch.

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Elsewhere, economists at high-street lender Lloyds Bank say the priority for Sunak is to continue supporting the economy, especially given the PM’s cautious roadmap out of lockdown.

The UK is expected to start exiting lockdown from March 08 with a final full reopening currently penned in for June 21, provided the current pandemic and vaccination trends continue.

Pre-announced measures include the extension of the furlough scheme until the end of September (but with government contribution to wages falling from July) - it is estimated this will cost about £20BN.

Above image courtesy of Capital Economics

More support for the self-employed is expected and there are reportedly £5BN worth of grants to be dished out, aimed at helping businesses reopen in sectors such as hospitality and retail, and £400M for the arts sector.

"Businesses will be watching to see whether the business rates holiday and temporary VAT reduction for some sectors will be extended. The stamp duty holiday may be extended," says Hann-Ju Ho, Economist at Lloyds Bank.

Sunak has made it clear he does intend to "level with the public" about putting the government’s finances on a more sustainable footing, given the surge in government borrowing over the past year.

"There is speculation of future tax rises including potential increases in corporation tax and the freezing of income tax thresholds. Forecasts for economic growth and the public finances will be closely watched, but the medium-term outlook remains subject to significant uncertainty," says Ho.