Last week was notable, and I guess unusual, in as much as most of the interest centred on the proud pound, and I would expect that emphasis to continue, particularly as the week progresses. As has been widely reported in the UK press, and therefore on this site, the Chancellor delivers his Autumn statement this coming Thursday, and speculation is rife – and the detail readily available, about what he might or might not do. The important thing for us, is to try and analyse what he might say, and whether it will affect the exchange rate.
Firstly it is important to note that we go into this week on a significantly bid footing. Cable is bid above previously significant technical resistance at 1.6260 ish, and the weekly/monthly close which was comfortably above this level, will in itself attract new buyers. On the crosses, the traditional strong v weak equation has led the world and even her estranged husband (and their 10 kids) to be long sterling/yen! So sterling has continuing market sentiment and positioning behind it, but of course these things rarely go smoothly!
The Chancellors speech will attempt to convince the population that the recovery in the UK`s position will eventually filter through to provide the prospect of more jobs and a lower cost of living. The policy announcements toward meeting these two objectives must be seen at least to be reasonably credible and workable in order for the Conservative party to be elected in May 2015. That single objective will naturally be the focus of the process that the Chancellor will initiate on Thursday, and much of the speech will be aimed at putting pressure on the opposition.
With all the indicators turning up, there is a general feeling that the last thing the government should do is to change its approach to an easier profile, so no significant giveaways are expected – the market will like that too (any giveaways will be stored up for next year!). Debt levels however are still onerous, and are correctly bugging the ratings agencies; optimism by the Chancellor about the prospect of sustained and sustainable growth will help assuage those concerns. He is certainly going to tell us about higher OBR growth forecasts in the UK, but those numbers ( 1.4% this year, and 2.2/2.3% for 2014) are expected, and in the price.
So as long as the Chancellor doesn`t try and bribe the electorate too soon by tax give-aways, and as long as he is seen to recognise the need to spread the scope of those benefitting from the recovery, then there should be little in his speech to upset sterling. Just be aware though of what I said earlier; we go into this in a very positive frame of mind. But, it is too far from an election for vote grabbing measures to be positive, a continued `austerity` profile is a gimme, and improved growth forecasts are discounted.
Think back for a moment to March this year when the OBR estimated UK GDP for 2013 as 0.6%, cable was 1.51, and sterling/yen was 141, we`ve come a long way since then and the improved position for UK plc has been reflected in the external value of the pound – although obviously these numbers are partly due to an easier dollar and a weaker – government engineered – yen. So yes of course sterling can go on from here, but it has a lot of recent appreciation, and a lot of discounted, newly positive sentiment to better. Tread carefully.
