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Are we going to see the UK finance minister increase spending?

GBP - British Pound

Sterling’s losses deepened on Wednesday as investors cut positions on concerns that Britain’s new finance minister Rishi Sunak’s budget announcement in March may disappoint those waiting for a pick-up in fiscal spending. Traders sold the pound around the $1.30 level after Tuesday’s gains after Coronavirus concerns also put the pound under pressure. Against the euro, sterling was down 0.6% at 1.1880.

Sunak is due to announce the newly formed government’s budget on March 11, but some analysts are doubtful there would be enough increases in spending to stimulate the economy and push up the pound, as previously expected. The Institute for Fiscal Studies think tank said on Wednesday that Sunak should resist the urge to rewrite Britain’s fiscal rules before the budget and that he should make plain that any spending increases will mean more tax.

There seems to be a decline in sterling volatility since the election in December, however as market participants remain less concerned by Brexit risk as they were post the election in early January.

Key Movers

The US dollar was little changed on Wednesday as Coronavirus headlines sapped dollar sentiment, with the greenback weakening after gaining earlier along with a rise in U.S. stocks.

The number of new coronavirus infections inside China - the source of the outbreak - was for the first time overtaken by fresh cases elsewhere on Wednesday.

The dollar was also supported as investors scaled back expectations that the US Federal Reserve would signal more policy easing in response to the spread of the coronavirus outside of China. Fed Vice Chair Richard Clarida said on Tuesday that while the central bank is monitoring the impact of the epidemic on the US economy, it is too soon to gauge if a change in monetary policy would be required. The dollar also traded near a three-month high versus the pound due to dashed expectations for big fiscal spending by the new UK finance minister.

Today sees Durable Goods orders, employment data and GDP from the US, which will be watched closely for signs of continued economic growth in the US.

German health minister Jens Spahn claims that Germany is at the beginning of a coronavirus epidemic, currently at 27 cases. Germany’s finance minister is considering fiscal spending boosts to support their flagging economy. Meanwhile, in Italy there are 470 cases with 12 deaths. Consumer confidence with the Eurozone will be watched closely today with a really poor figure of -8.1% expected. The Eurozone is struggling with the major economies reporting poor data recently, and the ensuing Coronavirus epidemic will only add salt to their wounds.

Some countries are starting to attack the Coronavirus situation with stimulus packages. Hong Kong announced a program that amounts to slightly more than 4% of GDP. They will be offering a one time cash disbursement of 10,000 Hong Kong dollars per person which is roughly $1,285. With that said, the process of applying will not begin until summer with cash payments likely to take months. While we don't expect such bold action by other governments, different forms of fiscal or monetary stimulus could be provided.

A number of economic reports are scheduled for release over the next 24 hours including New Zealand's trade balance, Eurozone confidence, Canada's current account balance, revisions to US Q4 GDP, US durable goods and pending home sales. New Zealand data is set to improve, which may explain why NZD outperformed AUD today. US GDP revisions are difficult to predict but durable goods orders should fall. While we don't expect President Trump to say anything meaningful this evening, traders should be vigilant around the time of his speech, scheduled for after the market close at 6pm New York time.


Expected Ranges

GBP/USD: 1.2820 - 1.2930 ▼

GBP/EUR: 1.1710 - 1.1840 ▼

EUR/USD: 1.0905 - 1.1980 ▲

GBP/AUD: 1.9500 - 1.9710 ▼

GBP/CAD: 1.7030 - 1.7225 ▼