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  • GBP/USD remains supported in the upper 1.3900s in wake of the unveiling of UK Finance Minister Sunak’s budget.
  • Markets seem to think the budget improves the economic outlook and money markets have seen hawkish BoE rate expectation repricing.

GBP/USD saw a pickup in volatility ahead of the 4pm London Fix, dropping to lows of the session in the 1.3920s only to then rebound into positive territory on the day in the 1.3980s. The pair is still a few pips off its European session highs of just above the 1.4000 mark, a level the bulls will likely be targeting, but has been holding up well, with GBP one of the best performing G10 currencies on the day.

UK Finance Minister Rishi Sunak’s budget announcement appears to have modestly over-delivered and this appears to be supporting sterling, which us currently trading higher by about 0.2% versus its US dollar counterpart. Money markets are now pricing in 10bps of interest rate hikes from the BoE by the end of 2022; the hawkish repricing of market expectations for BoE policy also seems to be offering sterling some support.

UK Budget: Summary

The main focus for GBP traders on Wednesday was the unveiling of the UK’s first budget in over a year (they had been repeatedly postponed given the disruption caused by the pandemic). As expected, UK Chancellor of the Exchequer Rishi Sunak announced a large package of support measures designed to 1) extend the government life support on offer to sectors currently forced shut by lockdown and 2) boost the post-pandemic recovery.

In terms of the specifics, starting with immediate economic support; furlough was extended until the end of September as expected, there are two new grants for the self-employed, the £20 per week boost to universal credit has been extended by six months, the national living wage is being raised to £8.91 from April, the 100% business rates holiday was extended until the end of June and then a 66% discount until the end of the year, the 5% hospitality VAT rate was extended until the end of September after which it will be 12.5% until the end of the year and, finally, the stamp duty tax cut has been extended until the end of June and the zero-rate band will be left at £250K until the end of September.

In order to power the post-Covid-19 recovery, the government announced; a new recovery loan scheme to replace the Bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme, a £5B fund for “restart grants” to start paying out in April, the creation of a new UK infrastructure bank with an initial £12B in capitalisation, a new “super-deduction of up to 130% for businesses that invest in the UK, an additional £2.4B for the devolved government of Wales, Scotland and Northern Ireland, government guarantees for mortgage loans of up to 95% of the value of a property and, finally, £1B for new town redevelopment deals.

That a lot of economic support and reflects the fact that Sunak is intent on prioritising the economic recovery over the course of the rest of the year. According to the OBR, the near-term spending amounts to roughly £44B or around 2% of annual UK GDP and, as a result, the OBR project that the annual UK deficit looks set to remain above 10% for the 2021/2022 tax year.

In order to fill the hole in the budget, UK Chancellor of the Exchequer Sunak’s latest budget is already taking steps in this direction; income tax thresholds, pensions lifetime allowance and inheritance tax allowance have now been frozen until 2026, while corporation tax is to rise from its current 19% level to 25% in 2023.

Net-net, desks seem to have concluded that the UK’s updated fiscal policy stance ought to minimise how much unemployment rises by when furlough does come to an end. The OBR is forecast the unemployment rate to hit highs of about 6.5% later this year, below the Bank of England’s forecast for the unemployment rate to 7.5%, though they may be changing this forecast in wake of the recent budget announcement.

Early lockdown easing?

Elsewhere, there is chatter amongst the UK press that the UK’s lockdown could be eased earlier than expected given that Covid-19 deaths are falling faster than SAGE had previously forecast (as of 22 February). Previous estimates from SAGE had expected the daily death toll to remain above 200 per day until mid-March. However, recent data has shown the daily death toll dropped below this figure by the end of February.

Comments from Professor Mark Woolhouse, an infectious disease expert at Edinburgh University and adviser to SAGE, to The Telegraph are being cited. Reportedly, he told the paper that “the data are indeed looking better than the models were predicting and, to the best of my knowledge, better than anyone was expecting” and that “if the phrase “data-driven not date-driven” has any meaning, then it must allow for the schedule for relaxing restrictions to be brought forward if the data are better than expected and not just putting the schedule back if the data are worse than expected”.