The FTSE has kicked off the day on the front foot as economic output showed signs of stabilising and ahead of the Spring Budget. Banks are leading the charge on the FTSE while the pound trades just shy of USD1.40 prior to Chancellor Rishi Sunak’s appearance. Sunak finds himself in the unenviable position of needing to support the UK economy through the pandemic recovery while public debt soars to a post-war high.
The Chancellor has pledged to do whatever it takes to support the economy out of the crisis. A major extension in fiscal support measures such as the furlough scheme, VAT cuts and help for home buyers is expected. The goal is to save the economy. However, concerns over sky-high debt can’t be completely swept under the carpet. A slight rise in corporation tax from 19% – a low level by European standards – is also more than likely. While we don’t expect Sunak to make any big moves on corporations, he is likely to outline a timetable for ongoing hikes as economic growth picks up.
UK service sector activity bottoms out
After a sharp fall in economic output in January, things are starting to look up for the UK economy. Economic output stabilised in February, although many businesses continued to suffer from lockdown restrictions.
The service sector PMI UK for February printed at 49.5 – a downward revision from the preliminary reading of 49.7 but significantly higher than January’s 39.5. The service sector contracted at a much slower pace than last month, although the fact that it did contract highlights that face-to-face business, travel and tourism and the hospitality sector continued to struggle.
FX – Pound look to Budget
GBP/USD – The pound is trading just below USD1.40 ahead of the Budget release. A slight positive push for sterling could be on the cards given the supportive fiscal measures that are expected from the Chancellor. This combined with the BoE’s step away from negative rates and passive stance to higher yields could well see the pound power towards USD1.45 as we head towards the summer.
However, any signs of a heavy hand regarding tax rises or spending cuts could drag the sterling quickly lower.
The US dollar is holding steady as bond yields continue to stabilise around 1.40%, and the upbeat mood is also keeping demand for the safe-haven subdued. Investors will look ahead to key releases today for further direction ahead of the NFP.