Sterling Rises Against Euro as Public Finances Improve
Philip Hammond and the Treasury are in the spotlight today as a report by the Office for National Statistics (ONS) revealed that the UK’s deficit was the smallest for any September in the last ten years. This is the third consecutive month that public finances have performed better than analysts’ expectations. In Brussels, Theresa May didn’t offer new financial concessions to the European Union (EU) leaders, but admitted that talks between the two sides didn’t prove fruitful during the summer. May noted that “an outcome that we can stand behind and defend to our people” is needed.
In the EU Summit, EU leaders clashed over the matter of taxing tech giants such as Google and Apple. In the US, the Senate voted in favour of a budget plan which made the path towards the tax reform clearer. Investors felt optimistic that the tax reform bill will be ready until the end of the year, as Donald Trump said in his latest interviews. Dow Jones Index closed above 23,000 and the US Dollar jumped.
Pound Sterling – UK Markets
Today, Sterling remained stable against the US Dollar with the exchange rate set at $1.31. The Pound surged against the Euro with the exchange rate set at €1.11. Theresa May’s talks with EU leaders in Brussels and the reduction of government borrowing were on the top news.
Chancellor Phillip Hammond had a reason to cheer on as the ONS released a report which said that public sector net borrowing had been lower than expected. More specifically, the UK government borrowed £5.9bn, which is the lowest figure for the month of September in the last ten years. The ONS also revised lower August’s public sector borrowing figure. In general, government borrowing in the fiscal year to date is at the lowest level since the financial crisis hit the UK.
Hammond is expected to present the new government budget in the end of November. The ONS report has left some room for Hammond for spending increases or tax cuts as it has undershot the borrowing forecast made by the Office for Budget Responsibility (OBR) in March. However, some analysts pointed out that, according to the OBR’s report, the anticipated reduced productivity growth in the next months will offset any short-term improvement in state finances.
US Dollar – US Markets
The US Dollar edged up against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY) also gained ground, coming in at 93.44. The Dollar strengthened after the Senate approved a budget plan for the next fiscal year.
The Senate, which is controlled by Republicans, approved the $4tn budget blueprint, increasing the chances for passing the tax reform bill until the end of this year. The vote was close, with 51 voting in favour and 49 against it. Only one Republican senator voted against the budget plan. If Senate and the House of Representatives agree on a common budget resolution, it means that Republicans will be able to pass the final tax bill with a simple 51-vote majority in the Senate.
The Senate’s blueprint adds $1.5tn to the federal government’s deficit over the next ten years in order to pay for tax cuts which Donald Trump has promised in his pre-election campaign. On the contrary, the House of Representatives has proposed a revenue-neutral approach. The Senate’s vote pushed up the demand for the Dollar. The Dow Jones Index closed at 23,163, which is the 52nd all-time closing high of the year.
Euro – European Markets
The Euro dipped against the US Dollar with the exchange rate set at $1.18. The single market currency was unable to resist the Dollar’s upsurge, after a vote in the Senate brought closer the possibility of the US tax reform materialising before the end of the year.
The German economy continues to show its teeth as the national statistics office released positive data regarding producer prices. According to the report, producer prices in September rose by 3.1%, on an annualised basis, which was 0.2% higher than what markets were anticipating. On a monthly basis, producer prices increased by 0.3%, surpassing analysts’ expectations. The European Central Bank (ECB) announced that the current account surplus widened in August to €33.3bn from €31,5bn in July.
The European Council meeting in Brussels is in its second and final day. French proposals over a new tax system that would go after tech giants such as Amazon, Google and Apple ignited a fight between the French President Emmanuel Macron and the prime ministers of Ireland and Luxembourg. In Spain, media sources said that the government will replace Carles Puidgemont with an appointed “minister for Catalonia” and plans to schedule new elections in the region of Catalonia in the first two months of 2018.
Other Currencies – Highlights
Sterling rallied against the Australian Dollar, trading at 1.67 AUD. HSBC analysts believe that local energy prices have spiked because of increasing energy exports and a change in renewables policy. In their report it is suggested that inflation has risen in the third quarter of the year, and, because of that, it has constrained domestic growth. Analysts urge the government to clarify its direction for energy and climate policy, if it doesn’t want uncertainty to weigh on local business investment.
The Pound kept on strengthening against the New Zealand Dollar, trading at 1.88 NZD. The Kiwi also fell against the US Dollar under the $0.70 mark for the first time since May. The Kiwi is falling as investors and traders believe that the Labour party policy agenda could have negative effects on New Zealand’s economy, such as an increase in fiscal spending, restrictions on migration and a change in the Reserve Bank of New Zealand (RBNZ) mandate.
Sterling inched higher against the Canadian Dollar, trading at 1.64 CAD. In the afternoon, Statistics Canada is going to release data regarding September’s inflation and August’s retail sales. Inflation is expected to rise to 1.6%.