Pound traders see Brexit-deal fears trumping budget, BOE impact

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Updated: October 29, 2018 12:31:08 AM

Hammond’s budget statement faces scrutiny both for his spending plan, after his boss Prime Minister Theresa May vowed to end austerity, and for the economic estimates from the Office for Budget Responsibility that come with it.

The Bank of England is scheduled to reveal its latest policy decision on Nov. 1 as it looks to update its forecasts for growth and inflation. (Reuters)

Even with a budget statement and a central bank decision this week, for pound traders it’s still all about Brexit.

Chancellor of the Exchequer Philip Hammond is set to deliver his annual spending plans — the last before the Brexit deadline in March — on Monday, while the Bank of England will announce its latest monetary policy decision on Thursday. Still, analysts are more focused on the likelihood of reaching a Brexit agreement and its impact on the pound after the currency last week headed for its worst performance against the dollar in months.

“It will get worse for the pound unless there is some positive news on the likelihood of a Brexit deal that will be passed by parliament,” said Jane Foley, head of currency strategy at Rabobank. “The budget is unlikely to have a major impact given this backdrop.”

Hammond’s budget statement faces scrutiny both for his spending plan, after his boss Prime Minister Theresa May vowed to end austerity, and for the economic estimates from the Office for Budget Responsibility that come with it. The OBR forecasts are set to hand Hammond a last-minute windfall, according to reports, with tax receipts said to exceed estimates.

“Traditionally, budgets aren’t a key focus for the pound, all that nitty gritty about tax thresholds doesn’t grab the attention,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA. “Overall forecasts can have an impact on sentiment, so might be marginally sterling positive, but I’d be surprised if there is a big move.”

The pound dropped 1.9 percent last week to around $1.2830 by the end of European trade on Friday, its steepest five-day decline since August. Investors spent the first part of the week awaiting a leadership challenge against May, before the currency extended losses as European Council President Donald Tusk said there was no guarantee a hard border in Ireland would be avoided.

The Bank of England is scheduled to reveal its latest policy decision on Nov. 1 as it looks to update its forecasts for growth and inflation. While money markets don’t see the central bank raising interest rates again until 2020, investors will be looking for guidance on how it views inflation and the Brexit outlook.

Hawkish comments from BOE Governor Mark Carney could give a temporary boost to sterling, but bulls are unlikely to get much comfort on the Brexit front next week. May’s Cabinet is nowhere near agreeing on a way to resume the negotiations with five months until Britain leaves the bloc.

“Perhaps the key thing about the budget is to get through it, get it voted on by Parliament and then move back to the Brexit talks,” said Bennett. “If these stall, then the pound will fall.”

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