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Dollar strengthens on US economic recovery
05 Mar 2021
The US dollar strengthened on Thursday after Jerome Powell indicated that inflation is likely to rise as the economy recovers in the coming months. Powell stated that interest rates are unlikely to rise unless the economy is running back to full capacity with full employment and more durable inflation. Powell believes that rise in the average price will not last long or be enough to change the Fed from its accommodative monetary policy.
Furthermore Powell said he did note the rise in yields did catch his attention, as have improving economic conditions. He believes that an economic recovery is on its way with the outlook looking a lot more positive. Raising interest rates, he added, would require the economy to get back to full employment and inflation to hit a sustainable level above 2%. He doesn’t expect either to happen this year. Powell went on to say, “there’s just a lot of ground to cover before we get to that,” he said. Even if the economy sees "increases in inflation, I expect that we will be patient."
USD -1:30 – Average hourly earnings – Forecast at 0.2% from previous 0.2%
USD – 1:30 – Non-farm employment change – Forecast at 197k from previous 49k
1:30 – USD – Unemployment rate – expected to remain unchanged at 6.3%
Spring Budget 2021: What’s in it for businesses and the pound?
05 Mar 2021
The economic blow dealt by the pandemic forced chancellor Rishi Sunak to deliver a spend now, tax later Budget. Outlining the government’s plans to drag the economy out of the Covid-19 crisis, he announced measures designed to deliver a short-term boost to businesses and jobs and significant tax rises to help rebalance the public finances. Ultimately, Mr Sunak’s eagerly anticipated statement painted a bleak picture of the state of the UK’s finances, with the responsibility for filling up a black hole falling at the feet of taxpayers.
As the nation prepares to take its first tentative steps out of another lockdown, against a backdrop of Europe’s most advanced vaccine rollout, let’s review the main talking points from the Budget – and analyse how they might impact the pound.
Business rates holiday extension
The business rates holiday, which was due to finish in England at the end of March, has been extended until 30 June, followed by a six-month period where rates will be discounted to one-third of the normal charge. This will provide prolonged relief for high street businesses forced to shutter their doors during the pandemic. The chancellor called it “a £6bn tax cut for businesses”.
Furlough scheme extension
The furlough scheme – which pays 80% of employees’ wages for the hours they cannot work during the pandemic – was scheduled to end in April. Mr Sunak confirmed that it would be extended until June in its current form, followed by a gradual phasing out until the end of September as employers cover a larger share of wages of laid-off employees. The extension is significant for a large section of the population, with 11.2 million jobs supported by the scheme since March 2020.
Support for the self-employed
While the furlough scheme supports employed people, the equivalent for the self-employed – the Coronavirus Self-Employed Income Support Scheme (SEISS) – which comes in the form of grants, will also continue. From April, those eligible can claim a fourth grant worth 80% of three months’ average trading profits, up to £7,500 in total, which will be followed by a fifth grant later in the year, covering May to September.
Stamp duty holiday extension
The stamp duty holiday – introduced to help buyers who might have taken a financial hit because of the pandemic – raised the property tax threshold from £125,000 to £500,000. This has been extended to 30 June when it will begin moving back to its original level by the end of September using an interim threshold of £250,000, which Mr Sunak said would “smooth the transition back to normal”.
The government has honoured its “triple tax lock” election manifesto promise, meaning there will be no changes to rates of income tax, national insurance or VAT – but it will freeze the personal allowances for income tax at their current levels until the end of the 2025-2026 tax year. So, how else will the chancellor fund his plan to spend £65 billion over the next two years supporting jobs, investment and the economic recovery?
In terms of personal tax, Mr Sunak is also freezing the tax-free thresholds on inheritance tax liabilities and pensions allowances until 2025-2026. Corporation tax on the other hand will experience a significant increase in 2023 from 19% to 25%, raising £17bn a year and ensuring corporate profits are taxed more heavily in the UK than most other advanced economies. This represents a sharper increase than many business leaders expected, as the government attempts to plug the gap created by its spiralling pandemic debts.
Mr Sunak is the first chancellor to raise corporation tax rates since 1974. However, to tempt companies to invest in the UK before the tax rises are triggered, he had a surprise up his sleeve: a £25bn “super-deduction” tax break for companies to stimulate investment in what he called the “biggest business tax cut in modern history”.
What does this mean for the pound?
Many of the key measures had been announced in advance of the Budget, meaning they were already priced into the market – and those that were not leaked are very pro-growth/pro-investment. Therefore, the pound experienced a muted reaction to the chancellor’s financial statement, holding relatively steady against the US dollar and euro – despite being generally well-received in the international markets. But with the fiscal taps left fully open over the coming months, providing strong support for the economy, the pound could profit from what has been labelled a ‘giveaway’ Budget – taking the total additional spending and benefits made available during the Covid crisis to £352 billion.
Looking further ahead, investors in the pound may have reservations over the government’s fiscal aid now, tax increases later approach to offset the spending splurge. For example, the proposed increase in corporation tax to 25% in April 2023 will lift the overall UK tax burden to its highest level in 50 years. However, the government’s revenue-raising process will not kick-in for over 12 months, leaving the pound unburdened by tax in the near-term and able to ride the wave of economic growth that is forecast this year.
Sterling remains stable after the Budget was announced
05 Mar 2021
Yesterday saw the announcement of Rishi Sunak’s highly anticipated Spring Budget. Almost one year on from his first budget, circumstances have most definitely changed.
This year’s budget was largely split into two. The first part was a large extension of the support already in place. The focal point was an extension of the furlough scheme in its current state until the end of June. Thereafter, employers will be asked to contribute 10% of the wage in July and 20% in both August and September. Self-employed support, universal credit uplift, restart grants, further business rate holidays, VAT rate cut for hospitality and the increased nil rate band remaining in place were all also announced. All of which costing the government an additional 44.3bln.
This brings the current total cost of all ‘rescue spending’ in place to around 355bln. This being said, the latter part of Sunak’s budget saw the chancellor announce his road map to begin balancing the books. The main lever he decided to use was an increase in corporation tax on profits above £250,000. A rise, from the current 19%, to 25% will come into effect in 2023, with some allowances for smaller businesses. A freeze in income tax thresholds , pension, inheritance and capital gain allowances were also announced after next year’s increase, and this will remain in place until 2026.
Sunak stated that the UK’s economic recovery will take a long time, but the Office for Budget Responsibility (OBR) is now much more optimistic over the rebound. The OBR now expects that the pre-covid level of GDP will be recovered by mid-2022, six months earlier than previously expected last November. In five years’ time, however, the economy will still be 3% lower than would have been the case without the pandemic.
Markets were fairly stable after the budget, most of which had already been leaked to the press. There was a small dip after Sunak announced the hike in corporation tax but this was shortly corrected and GBP/EUR and cable remains stable into this morning. All eyes are now on Fed Chair Powell this afternoon as he makes a speech at the WSJ event. Investors will be hopeful the Federal reserve address the largely rising bond yields.
10:00 GMT – EUR retail sales (YoY) (Jan) [Prev (0.6%), Exp (-1.2%)]
17:05 GMT – Fed’s Chair Powell Speech
Sterling remains supported ahead of Spring budget statement
03 Mar 2021
Sterling erased early losses against the dollar on Tuesday as the pound benefited from global investors purchasing UK assets amid fresh optimism that the UK economy is on track to show a post-Covid economic recovery. During early trade, sterling traded close to its lowest level for two and a half weeks as the increase in US bond yields helped strengthen US currency demand and put a brake on gains.
However, the downturn was relatively short-lived as sterling rebounded finishing the day higher. There was no clear reason for the rally in sterling, rather a combination of factors appear to be at play which is keeping the British currency supported. For instance, the UK’s vaccination program continues to excel, but also, the UK’s Covid-19 situation has improved with hospitalizations and deaths continuing to trend lower. As of yesterday, new Covid-19 infections fell to 5,455 which is close to a 50% improvement on the week prior, and Covid related deaths fell to 104 from 178 the week previous. Added to this, on Friday Bank of England member Andy Haldane downplayed the prospects of negative interest rates this year due to the potential for rising inflation then it would seem the pound has all the ingredients to hold firm at current levels.
British house prices also defied expectations of a slowdown last month and rose unexpectedly according to mortgage lender Nationwide. Market expectations of a 0.7% contraction were wide off the mark as house prices rose 6.9% compared with 6.4% last month on an annual basis.
The dollar started Tuesday’s trading session firmer but finished softer as risk appetite improved amid stability returning to US stocks. The dollar has benefited from recent volatility in stocks with rising yields in US bonds unsettling investors causing them to take risk off the table. As of yesterday, US treasuries stabilized with yields lower than last week's highs which have helped restore some calm to markets.
The improvement in risk appetite was also aided by comments from President Joe Biden who suggested that the US were making progress in their Covid vaccination rollout. According to the President, the US will have enough Covid-19 vaccine supply for every American by the end of May, an improvement of two months in the previous target set by the President.
12:30 – GBP – Spring budget statement
13:15 – USD – ADP Employment change expected to rise to 177k from 174k
15:00 – USD – ISM Services PMI Feb expected: 58.7 previous: 58.7
Sterling Falls as Risk Off
03 Mar 2021
Sterling fell against a basket of currencies on Friday as market sentiment shifted to risk-off following an aggressive sell-off in global stock markets.
Volatility in global stock markets has significantly influenced the value of sterling since the outset of the pandemic in March 2020 with sterling trading in close alignment with stock market swings. Often, sterling has appreciated when stocks have rallied and depreciated when stocks have fallen.
The main cause for the sell-off in stocks can be attributed to the rise in US government bond yields where investors have sold US treasuries over fears of higher inflation and expectations that an economic rebound in the US may in fact prompt the Federal Reserve to tighten their ultra loose accommodative policy. A tightening of Fed monetary policy could include withdrawing generous stimulus and potentially raise interest rates sooner than current market expectations. Thus, making it more expensive for businesses to borrow money which could limit further growth.
For now, sterling remains considerably supported. The main causes are: the U.K’s impressive vaccine rollout programme which plans to have offered everyone the chance of a vaccination before July end, their is a roadmap out of lockdown which could have all industries open by June and the Brexit deal struck in late December has also helped erased much of the uncertainty which strained the British currency for the last four years.
This week investor focus for sterling will be on the Chancellor Rishi Sunak’s Spring budget which is set to be announced on Wednesday. Rumours have circulated that the Chancellor could be set to extend furlough until the summer and may raise corporate taxes. As such, we can expect some volatility for sterling in the middle of the week.
13:00 – EUR – Harmonized Index of Consumer Prices (YoY) (Feb) Expected 1.6% Previous 1.6%
15:00 – USD – ISM Manufacturing PMI (Feb) Expected: 58.8 Previous 58.7
16:10 – EUR – ECB President Lagarde speech