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UK Budget 2018: Austerity “coming to an end” fails to lift GBP/USD

The UK Chancellor Phillip Hammond has delivered the UK’s budget today. Although he declared that the era of austerity is "finally coming to an end," sterling bulls were not impressed. The EUR/GBP hit its highest level since early October near 0.8900, while the GBP/USD hit a fresh session low beneath 1.2800 after the Chancellor had finished his speech.

Mr Hammond optimistically declared that the era of austerity is "finally coming to an end." He highlighted the fact that wages were at their highest in nearly a decade, among other achievements under the Conservative party. Improved growth forecasts and government borrowing means spending on public services will increase at an average rate of 1.2% over the next five years and would rise further should the UK strike a good exit deal with the EU. But perhaps the biggest surprise was kept to the end: personal tax allowance would rise from £11,800 to £12,500 from April next year, one year earlier than planned. This would put £130 in the pocket of a typical tax payer, said Mr Hammond.

Overall, though, the budget was a bit of a damp squib event as far as the pound’s reaction was concerned. Clearly, the market remains focused on other bigger issues, namely Brexit and the issue of Northern Ireland stalemate as the exit deadline approaches. Until and unless there’s some real breakthrough in Brexit talks, the pound’s reaction to domestic and non-Brexit news would be limited.

Pound to remain in focus ahead of BoE’s Super Thursday

Indeed, the Bank of England’s upcoming “Super Thursday” may not be so super, as for as the pound’s reaction is concerned. Interest rates are highly unlikely to be raised at this meeting. Although the BoE is increasingly becoming hawkish and would have probably hiked a few more times by now had Brexit not been an issue, the truth is that Brexit is indeed an issue – and a major one for that matter. The Monetary Policy Committee at the BoE does not want to be irresponsible and tighten policy only to loosen it again in the event of a no-deal Brexit. That being said, though, with the pound recently getting a hammering, any hawkish surprise from the BoE in the rate statement, votes, Inflation Report or comments from Governor Mark Carney, could cause a short-term positive reaction in the pound. But we are clutching at straws here to be honest.  

GBP/USD technical outlook

Without a doubt, the GBP/USD bulls will be disappointed to see a failure above Friday’s high when priced had created a small doji candle formation. Unless there is a last minute rebound, the cable now looks poised to drop below Friday’s low around 1.2775 and potentially head towards the next support at 1.2750 next. The August low at 1.2660/5 could be the next bearish objective in the event 1.2750 support also gives way.

However, in the event price goes back above Friday’s high of 1.2840 then the bulls will aim for the prior broken supports as their next immediate objectives at 1.2875 ahead of 1.2925/40 next, with the latter being a key resistance area.

In short, any rallies in the GBP/USD and other pound crosses will probably be short-lived until there’s progress on Brexit deadlock.


Source: TradingView and FOREX.com.

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