Pound to US Dollar Could Rise if Chancellor Announces Fiscal Reset

The GBP/USD pair rose strongly on Monday afternoon after Prime Minister Theresa May said she would endeavour to make the transition out of the EU as smooth as possible.

pound to dollar exchange rate 2

GBP/USD is trading at 1.2372.

The Pound has fallen in the run up to the Chancellor's Autumn Statement. 

Yesterday's Public Sector Borrowing data has not helped, for although it showed a welcome fall in borrowing, it was not sufficiently lower to indicate the government will hit its borrowing target for the year.

Markets are hoping the Chancellor will announce more spending to stimulate the economy, with suggestions being that he may rasie the minimum wage to 7.50, announce more house building work and cut VAT from 20% back down to 17.5%.

That his hands may be tied is the suggestion of some analysts, such as Ipek Ozkardeskaya of London Capital Group.

"Hammond has already warned that the UK's “eye-wateringly large debt” would give him little room for maneuver," said Ozkardeskaya.

But according to Bloomberg the government could feasibly borrow an extra 100bn, but that would almost certainly mean the previous governmnet's plans to balance the budget by 2020 would almost certainly have to be jettisoned, as it would result in an estimated 30bn black hole.

Given Hammond has said he is willing to drop plans to close the budget deficit by 2020, however, its plausible he may opt for a more generous fiscal 'reset'.

Such a move would push up UK yeilds, closing the gap with the US and putting upwards pressure on GBP/USD.

Theresa May's Soft Overture to Business

Sterling strengthened against the Dollar on Monday following comments from Theresa May, who was talking to members of the Consortium of British Industry (CBI), and said she wanted to avoid the “cliff edge” that businesses fear.

May said the government would seek early agreements on the status of EU immigrants living in the UK and UK immigrants living in the EU.

She also revealed her ambition to lower corporate tax rates to make them the lowest in the G20.

The Dollar stalled, meanwhile, after US bond yields became temporarily overstretched.

Tuesday saw the release of Public Sector Net borrowing figures for October, which showed the government borrowed 4.3bn.

This was less than expected (forecasts were for 5.9) and keeps the alive hopes of a fiscal ‘reset’ at tomorrow’s Autumn Statement, which would see the Pound’s rally extend.

Chart Watch

Looking at the four-hour chart, we see that GBP/USD has bounced off a long-term trendline (red) and moved sharply higher, following Theresa May’s comments.

It is now consolidating and forming what looks like a bullish flag.

The expectation is for a continuation higher the same distance as the initial bounce.

A break above 1.2520 would confirm such a move, to a target at 1.2650.

Alternatively, a break below the trendline and the 1.2302 lows is also plausible and would lead to a probable sell-off down to 1.2200.

Lloyds Commercial Banking also regard 1.2300 as a watershed level, above which they are biased slightly bullishly and below slightly bearishly.

“Our studies still warn that a broader range is more likely.

“Further gains through 1.2475 would allow the market to test more meaningful resistance in the 1.28-1.30 region, while a move back through ~1.2300 should see a re-test of the range lows,” they commented in a recent note.