Preview UK Summer Budget 2015
Wednesday’s emergency Budget comes on the back of the Conservative Party’s victory in May’s election. Although events in Greece are stealing the limelight, we still […]
Wednesday’s emergency Budget comes on the back of the Conservative Party’s victory in May’s election. Although events in Greece are stealing the limelight, we still […]
Wednesday’s emergency Budget comes on the back of the Conservative Party’s victory in May’s election. Although events in Greece are stealing the limelight, we still think that this week’s Budget has the potential to cause volatility in GBP markets.
The back drop:
The Conservatives have been fairly transparent about their desire to eliminate the budget deficit by the 2018/19 fiscal year, and most of the plans for spending cuts have already been leaked to the press. The Office for Budget Responsibility has forecast that spending cuts over the next two years will be twice as deep as any annual cut in the last parliament. The biggest cuts will come from the welfare budget where £ 12bn will be saved. However, other departments including police and education are also concerned about how cuts will impact job numbers along with their services.
Will this Budget hurt the UK economy?
Estimates suggest that 100,000 civil service jobs could be cut during this parliament, on top of the near 90,000 jobs lost during the last parliament, however, in recent years the private sector has picked up this slack. Already there have been warnings that growth could suffer as a result of decisions announced during this Budget, so to cushion some of the blow, Osborne has already announced some sweeteners including a change to inheritance tax law.
Typically the first Budget after an election can be see a Chancellor sneak in some tax increases, however he has promised not to increase income tax or corporation tax this year. Thus, watch out for stealth tax increases instead. We also expect a few surprise sweeteners, especially as £ 5bn is expected to be shaved off the budget deficit for this year on the back of a pick-up in tax revenues.
To make things as simple as possible, below we take a look at four things that we will be watching out for and what this could mean for the pound and UK stock markets:
City Index Budget watch list:
Overall, this emergency Budget may not have the glamour of the Greek crisis for the financial press, but George Osborne has the power to throw in a few surprises that could rattle financial markets, so it is definitely worth watching at 12.30 BST.
The technical view:
GBP/USD: We expect the pound to be in focus on Wednesday. As we mention above, the pound had a torrid day on Tuesday. In the last 24 hours the pound has faltered against all of its G10 peers apart from the Norwegian krone. GBP/JPY has been the worst performer, although this is mostly down to risk aversion caused by Greece. GBP/USD has also tumbled more than 1% so far this week.
It managed to find a critical support level around the 200-day sma at 1.5425. This leaves GBP/USD in an interesting position as we lead up to the Budget. If the market likes what it hears from Osborne then GBP/USD could recoup some losses, which may reinforce the 200-day sma as short-term low.
However, if we fall through this level then we could see a decline back to 1.5273 – the 100-day sma, ahead of the 5th May low at 1.5089.
EUR/GBP: this pair has been in consolidation mode post the Greek referendum result on Sunday, we continue to think that this pair is vulnerable to further downside, however, we think the bigger driver for this pair is European events, not the UK summer Budget. 0.7000 is a massive level of support, if Osborne’s Budget is considered GBP-friendly then we may test the air below this critical level.